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Digital Taxation: Widening the Scope of Equalisation Levy in India

Written by Ankit Mittal

Fifth Year, BBA. LLB. Symbiosis Law School, Noida


Source: Capital Numbers


Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.


Background


Bringing digital economies under the tax net has been a long-standing problem for tax authorities around the globe. Absence of physical presence, strong dependence on intangible assets, complex nature of the transactions, and the difficulty to identify the jurisdiction where value creation took place has allowed multinational corporations such as Amazon and Facebook to completely avoid payment of taxes in the source jurisdiction. The current taxation policy designed for brick and mortar activities has proved to be ineffective to tax the new digital economy.


Taxation challenges posed by the digital economies was one of the main focus areas of the Organisation for Economic Cooperation and Development’s (OECD) project on Base Erosion and Profit Shifting (BEPS) leading to the BEPS Action Plan 1 titled ‘Addressing the Tax Challenges of the Digital Economy’ [1]. The BEPS Action Plan 1 (hereinafter also referred to as ‘Action Plan’) aimed to modify the existing international taxation rules by building a global consensus on mechanisms to tax businesses with a substantial digital business footprint but no physical presence by the end of the year 2020. [2]


The Task Force on the Digital Economy (TFDE) in the Action Plan discussed and analyzed a number of potential options to address the challenges in taxing the digital economy including the feasibility of an equalisation levy. However, after analyzing the pros and cons of it in detail, TFDE recommended against the imposition of such a levy. Among other reasons for not recommending an equalisation levy was the reason that TFDE expected that many of the issues relating to taxation policy would be resolved once the BEPS project is complete and OECD comes out with its final report.


Even as the report recommended against the imposition of such a levy in general, it recognized that there may be fiscal and political imperatives for countries to take interim measures till the time a final consensus is built on this issue among the OECD member countries. Therefore, till the time a final conclusion is reached by all the OECD member countries collectively on this issue, TFDE allowed countries to adopt interim measures such as the imposition of equalisation levy or withholding, etc. as interim measures to deal with the problem.


Introduction of Equalisation Levy in India


Recognising the significance of the issues relating to e-commerce transactions, the Government of India set up a Committee on taxation of E-Commerce under the chairmanship of Shri. Akhilesh Ranjan to examine the direct tax issues in e-commerce transactions. The Committee submitted its report in February 2016 and recommended the imposition of an ‘Equalisation Levy’ on the payment for digital transactions to deal with the challenges posed by the digital economy. [3]


The Ministry of Finance accepted most of the recommendation of the Committee and as a result, an equalisation levy was introduced in India via Chapter VII of the Finance Act, 2016.


Section 164(d) of the Finance Act 2016 defined ‘equalisation levy’ as a tax leviable on consideration received or receivable on ‘specified services’. Further, section 164(i) defined ‘Specified Services’ as (i) online advertisement (ii) digital advertising space or any other facility or services for the purpose of online advertisement (iii) any other services as may be notified by the Central government.

Thus equalisation levy was a six percent tax leviable on online advertisement services provided by the non-resident service provider having no permanent establishment in India. The levy was payable to the central government on a reverse charge basis i.e. the obligation to pay the tax to the government was on the service recipient, not the service provider. The service recipient (Indian resident having a permanent establishment in India) was under the obligation to deduct a 6% levy from the total consideration payable and was liable to credit the same to the account of the central government by the seventh of next month in which the services were received.


Therefore, essentially equalisation levy was a tax levied on B2B online advertisement services where the aggregate of the consideration received by the service provider was over Rs. 1 Lakh. However, in the year 2020, the Government decided to expand the scope of the levy to also include the goods and services supplied by the e-commerce operators within the scope of the levy. Interestingly, although Section 164(i) of the Finance Act 2016 gave power to the government to expand the scope of the levy simply by issuing a notification notifying more services, the government chose not to use that power and instead amended the Finance Act.


The Finance Act 2020 inserted Section 165A into the Finance Act 2016. As per Section 165A, from 1st April 2020, an Equalisation Levy of two percent was chargeable on the consideration received by an e-commerce operator from e-commerce supply or services made/provided/facilitated by it. The legislation defined ‘e-commerce operator’ as “a non-resident who owns, operates, or manages digital or electronic facility or platform for the online sale of goods or online provision of services or both”[4]. Further, the term ‘e-commerce supply’ has been defined to include not only the goods or services supplied by the e-commerce operator directly to customers but also the sale of goods and services that were facilitated by it. [5]


Clearly, the terms ‘e-commerce operator’ and ‘e-commerce supply’ have been defined in the widest possible sense and as a result, all e-commerce suppliers such as Amazon, Netflix, Airbnb, etc. will come within the scope of this definition. It is also important to note that unlike the levy on specified services, where Indian residents were responsible to deduct and credit the amount to the Central Government on a monthly basis, in case of e-commerce operators, the burden to pay the tax is on the non-resident e-commerce operator and not the customer. The e-commerce operator is thus required to credit the levy directly to the central government on a quarterly basis.


The expanded scope of levy stretches beyond goods and services supplied to Indian residents. It now includes supplies made to any person using an Indian Internet Protocol address.

Some of the new amendments are strange and could stir up litigation in courts. For instance, a sale between two non-residents involving data collected from Indian residents is now subject to the equalisation levy, as that is one of the “specified circumstances” mentioned in Section 165A(3)(ii) of the newly amended Finance Act of 2016. Here the IP address of the Indian residents is being used as a base to establish a territorial nexus to tax an income which otherwise was outside the preview of tax authorities since it was a transaction taking place outside India involving two non-residents having no permanent establishment in India using an IP address located outside India. Whether the IP address of the people whose data is being transacted constitutes a sufficient base to establish a territorial nexus or not remains to be seen as this issue may be tested in the court of law.


Concerns of The Industry


E-commerce operators have expressed some serious concerns over this levy. The expansion of the scope of levy came as a major shock to the industry. There was no mention of the amendments to the equalisation levy in the budget speech of the Finance Minister which interestingly was the longest ever budget speech in the history of India. [6] Even the text of the Finance bill presented before the house did not contain the amendments to the levy, yet somehow the amendments made their way to the Finance Act 2020 which was passed in the Lok Sabha on 23.03.2020. [7] As the amendments became effective from 1st April 2020, seemingly without any consultation whatsoever, the e-commerce operators did not have much time to analyse the impact of the new regulations and streamline their business practices accordingly.


The amendments in Finance Act have been made without any corresponding change in the tax treaties. As a result, the credit of tax paid in India will not be available to the e-commerce operators in their own country. The change comes at a time when the economy is already suffering from the slowdown caused by COVID-19. [8] Consumer spending has taken a hit and so has the revenues of e-commerce operators. At a time when the industry was looking for some financial relief to boost demand, the government has introduced this levy, the burden of which will ultimately fall on the consumers. This will push up the cost of many e-commerce services in India.


Many industry giants such as Google, Microsoft, Adobe have registered their protest with the US government alleging that the levy is ‘highly discriminatory’ against foreign companies. [9]

Apart from this, several global industry associations including the US India Business Council, Australia Services Roundtable (ASR), Information Technology Industry Council (ITI), Japan Electronics and Information Technology Industries Association (JEITA) have also raised their concerns about the levy and have written a letter to the Finance Minister of India seeking formal consultation with the government and a nine-month interim delay in the implementation of the levy on e-commerce operators. [10]


The US government, in its latest report on trade barriers, has cautioned that India’s move to impose the levy was likely to impede its overseas trade and increase the risk of retaliation from countries where Indian companies are doing business. [11]


Even as these developments take place, it seems highly unlikely that the government is going to roll back on its decisions. Whether or not these measures will be re-evaluated once the OECD comes out with its final report at the end of this year or early next year remains to be seen.


[1] OECD (2015), Addressing the Tax Challenges of the Digital Economy, Action 1 - 2015 Final Report, OECD/G20; Base Erosion and Profit Shifting Project, OECD Publishing, Paris.; https://www.oecd-ilibrary.org/taxation/addressing-the-tax-challenges-of-the-digital-economy-action-1-2015-final-report_9789264241046-en [2] KPMG; ‘Interim measures for taxing the digital economy allow time for global consensus’ (2018), https://home.kpmg/xx/en/home/insights/2018/07/taxing-the-digital-economy.html (last visited May 26, 2020). [3] Proposal For Equalization Levy On Specified Transactions, Final Report Feb 2016; Prepared by Committee on Taxation of E-Commerce https://www.incometaxindia.gov.in/news/report-of-committee-on-taxation-of-e-commerce-feb-2016.pdf

[4] Section 153(ii) of the Finance Act 2020 [5] Ibid [6] Sitharaman gave longest-ever Budget speech, but had to cut it short, Hindustan Times (2020), https://www.hindustantimes.com/india-news/finance-minister-nirmala-sitharaman-s-budget-2020-speech-was-longest-ever/story-UaKhHqA7PxCHoqR8ihJawJ.html (last visited May 24, 2020). [7] Deeksha Rathi, India's amended equalisation levy: a change players in the digital economy could not have foreseen (via Passle) Passle (2020), https://www.europeantax.blog/post/102g4a9/indias-amended-equalisation-levy-a-change-players-in-the-digital-economy-could (last visited May 25, 2020). [8] FE Online, Expansion of equalisation levy: Why it's not well-timed The Financial Express (2020), https://www.financialexpress.com/industry/expansion-of-equalisation-levy-why-its-not-well-timed/1912985/ (last visited May 22, 2020). [9] Surabhi Agarwal, Big tech takes equalisation levy row to US govt The Economic Times (2020), https://economictimes.indiatimes.com/tech/internet/big-tech-takes-equalisation-levy-row-to-us-govt/articleshow/74922783.cms?from=mdr (last visited May 23, 2020). [10] Gulveen Aulakh, Global MNCs and startups seek delay of equalisation levy The Economic Times (2020), https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/global-mncs-and-startups-seek-delay-of-equalisation-levy/articleshow/75446524.cms?from=mdr(last visited May 25, 2020). [11] Ibid

Bibliography


Statutes

  1. The Finance Act 2016 (Act No. 28 of 2016)

  2. The Finance Act 2020 (Act No. 12 of 2020)


Reports

  1. OECD (2015), Addressing the Tax Challenges of the Digital Economy, Action 1 - 2015 Final Report, OECD/G20; Base Erosion and Profit Shifting Project, OECD Publishing, Paris.; http://dx.doi.org/10.1787/9789264241046-en

  2. OECD (2018), Tax Challenges Arising from Digitalisation – Interim Report 2018: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/9789264293083-en

  3. Proposal For Equalization Levy On Specified Transactions, Final Report Feb 2016; Prepared by Committee on Taxation of E-Commerce ; https://www.incometaxindia.gov.in/news/report-of-committee-on-taxation-of-e-commerce-feb-2016.pdf

Websites

  1. Deeksha Rathi, India's amended equalisation levy: a change players in the digital economy could not have foreseen (via Passle) Passle (2020), https://www.europeantax.blog/post/102g4a9/indias-amended-equalisation-levy-a-change-players-in-the-digital-economy-could (last visited May 25, 2020).

  2. FE Online, Expansion of equalisation levy: Why it's not well-timed The Financial Express (2020), https://www.financialexpress.com/industry/expansion-of-equalisation-levy-why-its-not-well-timed/1912985/ (last visited May 22, 2020).

  3. Gulveen Aulakh, Global MNCs and startups seek delay of equalisation levy The Economic Times (2020), https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/global-mncs-and-startups-seek-delay-of-equalisation-levy/articleshow/75446524.cms?from=mdr (last visited May 25, 2020).

  4. KPMG; ‘Interim measures for taxing the digital economy allow time for global consensus’ (2018), https://home.kpmg/xx/en/home/insights/2018/07/taxing-the-digital-economy.html (last visited May 26, 2020).

  5. Sitharaman gave longest-ever Budget speech, but had to cut it short, Hindustan Times (2020), https://www.hindustantimes.com/india-news/finance-minister-nirmala-sitharaman-s-budget-2020-speech-was-longest-ever/story-UaKhHqA7PxCHoqR8ihJawJ.html (last visited May 24, 2020).

  6. Surabhi Agarwal, Big tech takes equalisation levy row to US govt The Economic Times (2020), https://economictimes.indiatimes.com/tech/internet/big-tech-takes-equalisation-levy-row-to-us-govt/articleshow/74922783.cms?from=mdr (last visited May 23, 2020).


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