Equalisation Levy – Further armed to tax more digital transactions?
In this article
Among the amendments brought in by the Budget 2021 one interesting amendment has been in the provisions related to the Equalisation Levy on E-commerce. The amendment aims to bring in some much needed clarity to the various e-commerce companies operating in India and is believed to take a step further in taxing the digital economy.
In this article, we have NC Hegde, Zainab Bookwala and Paras Modi from Deloitte Haskins & Sells LLP who discuss the amendments proposed in Union Budget 2021 on the applicability of EQL provisions.
Digital transformation of businesses and market adaption to this evolution has been ongoing. Taking a cue from the G20/OECD BEPS Action 1 which deals with the challenges of digital economy and pending global consensus on taxation of the digital economy, India introduced Equalization levy (‘EQL’) under its domestic tax laws in the year 2016. EQL was to be levied at the rate of 6 percent on non-resident companies engaged in online advertisements and related services.
The Finance Act 2020 widened the ambit of EQL by a separate 2% levy on online sales of goods and services in India by overseas e-commerce operators. This amendment evoked surprise and concerns of many non-resident enterprises having India as a major market destination for goods and services, especially those who had no physical presence in India. Moreover, since the aforesaid amendment was effected through the provisions of the Finance Act and not under the Income Tax Act, tax treaty relief is not available for EQL. Besides, the new EQL provisions suffered from many interpretation issues including inadvertent typographical error leading to confusion among taxpayers. The ambit of certain definitions viz. e-commerce operator and online supply of services and goods were subject matter of debates. The CBDT amended the EQL rules but interpretation issues continued. The EQL provisions were also recently termed as ‘discriminatory’ and an unilateral act of taxation contrary to the OECD’s principle of global consensus-based solution pursuant to report of investigation section 301 of Trade and Investment Agreement by the US Trade Representative office.
Many tech giants had raised concerns in relation to the said levy citing various reasons such as difficulty in tracing the IP address, additional compliance burden in India, short time frame to revamp the systems and so on. Therefore, the introduction of EQL provisions with respect to online sale of goods and services left the thriving digital and online solutions industry grappling with interpretations issues and many industry players and forums had made representations before the Government to postpone the levy of EQL and provide more clarity. Besides there has been a need expressed that distinct definitions of “e-commerce operator” under the GST and Income Tax laws ought to be rationalized.
The above did not elicit any response / clarification from the Government. .
As per the extant law, EQL provisions are applicable to non-resident e-commerce operators who own, operate, or manage digital or electronic facility or platform for online sale of goods or online provision of services or both and derive revenues from e-commerce supply or services made or provided or facilitated by it.
The transaction covered under the EQL provision are as follows:
- Online sale of goods owned by the e-commerce operator
- Online provision of services by e-commerce operators
- Facilitation of online sale of goods or provision of services or both by e-commerce operator
- Any combination of the above
Section 10(50) of the Income Tax Act 1961, (the Act) provided that the incomes on which such EQL has already been deducted and paid, shall be exempt from tax under the normal provisions of the Act. However, the said exemption was effective from 1 April 2021 whereas the EQL provisions were effective from 1 April 2020, a possible inadvertent typographical error, now corrected by the Finance Bill 2021.
Following are some of the key concerns raised by various stakeholder, which required government intervention:
• Applicability of EQL provisions on certain income taxable as Royalty or fees for technical services;
• Applicability of EQL to inter-company support services and such other transactions
• Whether EQL shall apply even if one leg of the transaction is online
• Inconsistency in dates of exemption provided under the Act on which EQL is paid.
• Challenges around optimising tax cost, since tax treaty benefit shall not be applicable to EQL as EQL is levied under the Finance Act and is not part of the Indian Income-Tax Act, 1961.
The government vide Finance Bill 2021, has tried to resolve some of the aforesaid concerns. The key amendments as proposed in the Finance Bill 2021 are discussed in subsequent paragraphs.
It is proposed to insert an Explanation to section 163 of the Finance Act 2016, to clarify that income taxable as royalty or fees for technical services under the normal provisions of the Act, shall be excluded from the definition of specified services and consideration received or receivable for e-commerce supply or services.
In light of the above, royalty and FTS payments are exempt from the levy of EQL and this could especially be beneficial for non-residents based out of countries where royalty and FTS payments are exempt under the provisions of the Double Taxation Avoidance Agreement. This will also save the non-residents from carrying out additional compliances in India in relation to EQL.
Another important amendment proposed is with regards to clarity on the terms ‘online sale of goods’ and ‘online provision of services’. It is proposed to insert Explanation to clause (cb) of Section 164 of the Finance Act 2016 wherein e-commerce supply or services is defined. As per the said Explanation online sale of goods and online provision of services shall include one or more of the following activities taking place online:
• Acceptance of offer for sale;
• Placing the purchase order;
• Acceptance of the Purchase order;
• Payment of consideration; or
• Supply of goods or provision of services, partly or wholly
It may be emphasized that since the definition is inclusive, it is not necessary that all aspects of the supply of goods/service have to be online for the EQL to be attracted; EQL will be attracted even if any one aspect of the transaction is online and rest are offline. For example, (i) EQL will apply if the contract of supply of goods/service is executed online, but delivery is offline (ii) EQL will also apply if the contract is executed offline, but delivery of goods/services is online.
Another important amendment relates to section 165A of the Finance Act 2016 wherein it is proposed to provide that consideration received or receivable from e-commerce supply or services shall include:
consideration for sale of goods irrespective of whether the e-commerce operator owns the goods; and
consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator.
Clarification that the exemption under section 10(50) of the Act shall be applicable from 1 April 2020 will resolve the unintended ambiguity of double taxation both under the Act as well as under EQL provision for the financial year 2020-21.
The amendments proposed in Union Budget 2021 while resolving a lot of uncertainty will also lead to a very widespread applicability of EQL provisions. These clarifications clearly show the intent of the Government to levy a tax with a very broad-brush ignoring concerns made in the several representations. The government is clear that any e-commerce transaction fully or in part, generating income through some form of India nexus, should not be left out from the ambit of digital taxation. Thus, there is an imperative need for all non-resident entities engaged in digital business or transactions having India nexus to carefully evaluate the resulting implications thereof. Whilst unilateral measures by various countries to tax the digital economy such as the EQL may finally lead to much awaited global consensus on a uniform tax policy to tax digital transactions. .
Mr. NC Hegde is a Partner with Deloitte Haskins and Sells LLP
Ms. Zainab Bookwala is a Senior Manager with Deloitte Haskins and Sells LLP
Mr. Paras Modi is a Manager with Deloitte Haskins and Sells LLP