Taxing the digital economy: Indian Equalisation Levy 2.0
While the OECD is working towards developing consensus on an inclusive framework to address tax challenges from digitalisation of the economy, several countries have introduced unilateral measures to tax the digital economy. In 2016, India introduced an Equalisation Levy on revenue earned by non-residents from online advertising and related services. In 2019, the Indian Income tax law was amended to introduce the concept of ‘significant economic presence’. However, while passing the Finance Act 2020, the Indian government deferred its implementation, citing the absence of effective measures in the tax treaties. What came as a surprise to everyone was the introduction of an Equalisation Levy on sales of goods and services in India by overseas e-commerce operators, which did not form part of the original Union Budget 2020-21 proposals. This levy is effective from 1 April 2020 and in its present form, has wide-ranging coverage.
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):
- Online sale of goods owned by the e-commerce operator; or
- Online provision of services provided by the e-commerce; or
- Online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
- Any combination of the above-mentioned activities
The levy is applicable on consideration received by the e-commerce operator on the above transactions from a:
- Person resident in India
- Non-resident, where the:
- Sale of advertising, which targets a customer who is resident in India, or a customer who accesses the advertising though an IP address located in India; and
- Sale of data, collected from a person who is resident in India or from a person who uses an IP address located in India
- Person who buys goods or services, or both, uses an IP address located in India.
Thus, the levy captures online sales of any goods or provision of any services by or through a non-resident e-commerce operator.
A question emerges whether in the case of online market-place operators or aggregators the consideration subject to the levy is the gross value of goods or services traded on the platform, or the facilitation fee or commission charged by the market-place operators or aggregators.
Key features of Equalisation Levy 2.0
1. 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. While the Equalisation Levy is imposed at 2%/6%, as the case may be, the rate of tax withholding on certain transactions could be anywhere from 10% to 20%. 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.
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 take into account 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.
3. Wide 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.
4. Onus of compliance cast on the non-resident e-commerce operator
Unlike the earlier Equalisation Levy which required the levy to be deducted by the service recipient, the new levy is to be collected by the e-commerce operator. The e-commerce operator is required to deposit the levy to the credit of the Indian treasury on a quarterly basis:
Quarter Ending On
Due Date of Payment
Any delay in payment would be subject to additional interest on the delayed amount. Any default in payment may result in a penalty for the e-commerce operator equal to the amount of the Equalisation Levy in default.
The e-commerce operator is required to submit an annual statement by 30 June following the year ending on 31 March i.e. the statement for the tax year ending 31 March 2021 would need to be filed by 30 June 2021. If an e-commerce operator fails to file the annual statement within the specified date, an additional penalty of INR 1,000 per day of continuing default may be levied.
5. Not a levy under the Indian Income tax law
The new levy is to be calculated at 2% on the consideration received by the e-commerce operators. Thus, a question arises 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 into 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 an increase in the overall tax cost for the e-commerce operators.
6. Extra-territorial operation
Transaction(s) between two non-residents where either the market place 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.
Some legal questions
The law, in its present form, prompts many questions, including:
- When a supply of goods from a foreign country is not subject to tax in India, is it fair to subject it to the Equalisation Levy just because the transaction is concluded on a digital platform?
- Can there be an Equalisation Levy in a transaction of supply (which is subject to Indian GST)?
- Consideration in respect of certain transactions is subject to GST under a reverse charge - can the same amount be subject to the Equalisation Levy?
- Is the Indian Equalisation Levy inconsistent with India’s treaty obligations?
Major tech giants across the globe have expressed their concerns over the new levy, remarking that the effective time window for them to comply with the new levy is too short. Many have also expressed concern that their systems would need to keep track of IP addresses, and their invoicing systems may require considerable overhaul. Considering the current situation and the limited window for compliance, several representations have been made to defer the implementation of the levy.
However, India is not the only country to introduce tax on digital transactions; several countries have introduced a digital services tax or withholding taxes on digital transactions, and many are evaluating the same. On the other hand, businesses have raised concerns over unilateral measures adopted by these countries without waiting for a global consensus, resulting in increased tax costs. Recently, the Government of the United States of America has also initiated an investigation of digital taxes levied by some countries, including India. For further information, see our Taxation of the digital economy tool.
While digitalisation of the economy has solved many business challenges, it has given rise to tax challenges, which appear to be far from being solved.