Over the last decade, Information Technology (IT) has gone through an exponential expansion phase in India and globally. This has led to an increase in the supply and procurement of digital services.
The Finance Act 2020 has now been amended to impose an Equalisation Levy of 2% on consideration received by ‘e-commerce operator’ for e-commerce supply of goods or service. While the levy was initially imposed on B2B transactions, the present amendment attempts to cover even B2C transactions in its ambit.
Effective from 01 April 2020, the Government of India has widened the scope of its equalisation levy to include e-commerce sales of goods and services provided by non-resident operators to Indian customers.
The equalisation levy is imposed at 2% on the considerations received or receivable by the non-resident e-commerce operators. Businesses based in Mauritius or other jurisdictions and engaged in e-commerce activities in India have to assess the impact of this new levy on their business model and start thinking ahead on how this levy could potentially impact on their cost structure or could be used as a foreign tax credit.
The first quarterly filing of the equalisation levy for qualifying e-commerce operators is due by 07 July 2020 for the period April to June 2020. It is important to adhere to this new compliance obligation in India to avoid penalties and interest.
Equalisation Levy 2.0
The Equalisation Levy introduced by the Finance Act 2016, was charged at 6% on certain online advertising and related services. The Finance Act 2020 amended the Finance Act 2016, introducing a new Equalisation Levy at 2% on the consideration received/receivable by an e-commerce operator from the following transactions (e-commerce supply or services):
Sale of goods owned by the e-commerce operator online
Online provision of services provided by the e-commerce
Online sale of goods or provision of services or both, aided by the e-commerce operator
Any combination of the above-mentioned activities
Key features of Equalisation Levy 2.0
Understanding the impact
Consideration subject to the Equalisation Levy has been exempted from Indian Income tax and thus not subject to tax withholding. Further, no credit is available for the Equalisation Levy against the Income tax liability in India. To analyse the overall impact, one needs to consider the credit for withholding tax that may be available in the country of residence. Thus, a threadbare examination of certain services may be required to determine whether they are subject to the Equalisation Levy or Withholding taxes.
Exclusions
The levy does not apply in the following cases:
- E-commerce operator has a Permanent Establishment in India and the e-commerce supplies or services are effectively connected with such Permanent Establishment
- Transactions covered by the Equalisation Levy under Finance Act 2016.
- Where sales, turnover or gross receipts from e-commerce supplies or services is less than INR 20 million during the relevant tax year.
- The turnover/gross receipt threshold would consider sales made to Indian customers through the e-commerce platform operated by a non-resident (not just by the non-resident e-commerce operator). Considering the threshold of INR 20 million (approx. USD 260,000), all large global e-commerce platforms catering to Indian customers are likely to be covered (unless transacting through a tax resident entity in India or a permanent establishment in India).Glaringly, there are no exclusion thresholds prescribed with respect to the number of transactions or number of users.
Broad definition of E-commerce operator
‘E-commerce operator’ has been defined to mean a non-resident who owns, operates, or manages a digital or electronic facility or platform for online sales of goods or online provision of services, or both. Both ‘e-commerce supply or services’ and ‘e-commerce operator’ have been defined widely to cover more than the normally understood connotation of marketplace intermediaries and aggregators. Business are increasingly looking to a digital medium not just to promote but also to sell their products/services (likely to further increase in the wake of the current pandemic). Some of these businesses may not have been taxable in India in the absence of a business connection or a permanent establishment in India but would now be within the ambit of the Equalisation Levy.
Counted, Not a levy under the Indian Income tax law
As per the new rule, the new levy is to be calculated at 2% on the consideration received by the e-commerce operators. So, a question appears whether the levy, in substance, is a levy on income earned by a non-resident e-commerce operator? Furthermore, the levy is imposed under the Finance Act 2016 and not as a part of the Indian Income Tax Act, 1961.
Most of the tax treaties entered by India cover Income tax, applicable surcharges, or other substantially similar taxes. As a result, a claim for credit of the Equalisation Levy against a tax liability in the country of residence may not be available, giving rise to double taxation and hike in the overall tax cost for the e-commerce operators.
Extra-territorial operation
Transaction(s) between two non-residents where either the marketplace is in India or the IP address is Indian, are brought under the ambit of the new levy.
Based on a plain reading of the law, the levy would cover transactions of a non-resident tourist purchasing goods or services on a non-resident-operated e-commerce platform, using an Indian IP address (irrespective of the place of consumption and the mode of payment). Thus, even where the transaction is between two non-residents, the payment is made from a foreign bank account, and the goods or services consumed overseas could be subject to the levy, merely due to use of an India IP address. Practical operation and implementation of the levy in such a situation may be a different challenge.
Another challenge could be in attributing the income in the case of a consolidated consideration. For instance, a Multinational Enterprise might implement a global advertising campaign to target global audiences, for which purpose it approaches a digital platform operator and agrees a consolidated fee. In this case, there would be challenges in allocating the consideration in relation to the targeted Indian audience.
Applicability of Equalisation Levy
Equalisation Levy is referred as direct tax, which is withheld at the time of payment by the service recipient.
The two conditions need to be fulfilled for liable to equalisation levy:
The payment should be gone to a non-resident service provider.
The payment annually made to one service provider exceeds Rs. 1,00,000 in one financial year (FY).
Services Covered Under Equalisation Levy
For Now, not all services are covered under the equalisation Levy.
The services covered are as follow: –
- Online advertisement.
- Any provision for digital advertising space or services for the plan of online advertisement.
- As and when any other services are notified will be included with the aforesaid services.