Introduction
The recent developments in India concerning introduction of Equalisation Levy (‘2020 Levy’ / ‘EL’), can be seen as an albatross around the neck for the non-resident e-commerce players[1]. With an increase in compliance burden and potential increase of costs, many of the e-commerce players consider unilateral measures taken by India as a deterrent to an effective business model.
A peculiar issue relating to 2020 Levy which has grabbed the attention of such e-commerce facilitators is regarding the amount on which the e-commerce facilitators should charge equalisation levy.
E-commerce marketplace facilitates sale of goods belonging to other vendors through their platform. The revenue earned by such ecommerce operator is only certain percentage of commission on the total sales price.
The question is on what value the ecommerce operator should pay equalization levy? Should it be on the entire sale value of goods or should it be only on the commission amount? Similarly, how the threshold of INR 2 crore as provided in the 2020 Levy provisions should be calculated in case of facilitators?
The way the 2020 Levy provisions have been worded, they do not provide a clear answer to the above questions. Owning to the same, the rules of legal interpretation for statutory provisions assume significant importance. The two possible views for the above questions are envisaged as below:
View I - The threshold amount of INR 2 crores as well as the base amount for 2020 Levy would be based on the gross amount collected by the e-commerce operator, including the amount which would be eventually passed on by the e-commerce operator to the vendors; or
View II - The threshold amount of INR 2 crores as well as the base amount for 2020 Levy would be based on the commission retained by the e-commerce operator.
This article discusses in detail the possible arguments in favour of both the above mentioned views.
Arguments in support of View I (gross amount collected)
- Literal reading of the charging provision
The literal reading of Section 165A of the Income Tax Act, 1961 (‘Act’) Finance Act, 2016 suggests that the 2020 Levy is to be charged on the entire consideration which is received by the e-commerce operator from e-commerce supply or services (whether such sale is of goods that are owned by the e-commerce or merely facilitated by it; or such services are provided by the e-commerce operator or merely facilitated by it).
It may be argued that the emphasis in the definition of ‘e-commerce supply or services’ is on the activity of ‘online sale or provision’ and not on activity of ‘facilitation’.
Considering the above, when the charging provision is read with the above definition, following is the literal reading of the charging provision:
- EL shall be charged on total consideration from online sale of goods (whether owned or facilitated by the e-commerce operator);
- EL shall be charged on total consideration from online provision of services (whether provided or facilitated by the e-commerce operator)
- Purpose of equalization levy
One of the alternatives discussed in BEPS Action Plan 1 is to charge 2020 Levy on transactions involving sale (or exchange) of goods and services between two or more parties effectuated through a digital platform. It suggests the levy to be imposed on the gross value of the goods or services provided to in-country customers and users, paid by in-country customers and users, and collected by the foreign enterprise via a simplified registration regime, or collected by a local intermediary.
Keeping the above background in mind, the intent behind introducing EL by India is to tax the revenue earned from goods and services supplied online (through a digital platform) to customers or users in India. Therefore, the base value on which such EL is to be applied will be the gross revenue earned from such supply of goods and services to the users in India. It cannot be the intention to restrict the 2020 Levy to only the commission or remuneration earned by the e-commerce operator for facilitating such online sale or service.
- View II leads to a differential treatment in certain situations
If 2020 Levy is charged only on the amount of facilitation income of the e-commerce operator (i.e. View II is accepted), this would lead to differential treatment in almost similar situations. For example:
- Where a non-resident manufacturer (who also qualifies to be an e-commerce operator) sells goods in India through his own platform, he would be required to pay the 2020 Levy on the entire sale consideration.
- However, where the same non-resident manufacturer sells its goods through a facilitator (i.e. another ecommerce operator), the operator would be liable to pay the 2020 Levy only on facilitation income (and not the consideration towards the goods).
Such a differential treatment to two business models cannot be the intent of the Legislature.
- Tax levied and collected from a person need not necessarily be linked only to his revenues/ income
Inspite of the fact that the EL has been introduced in the background of challenges discussed in BEPS Action Plan 1, the levy per se has not been shown to be in the nature of income tax (i.e. tax on income of the e-commerce operator). It is a levy on certain transactions, viz. online sale of goods or online provision of services, either carried out by the e-commerce operator or facilitated by the e-commerce operator. Therefore, there is no anomaly if the tax is calculated by taking the overall revenue generated from such transaction as the base (irrespective of whether such gross revenue belongs to the e-commerce operator or vendor).
Arguments in support of View II (commission retained)
- Literal reading of the provision
The literal reading of Section 165A suggests that 2020 Levy is to be charged on the consideration which is received or receivable by the e-commerce operator.
The consideration received or receivable in different situations would be as follows:
- Where such operator is acting in the capacity of the owner of goods, the ‘consideration’ referred under Section 165A shall be the consideration towards ‘sale of goods’.
- Where such operator is acting in the capacity of a facilitator for such goods, the ‘consideration’ referred under Section 165A shall be the consideration towards ‘facilitation’.
- ‘Received or receivable’ means ‘received and retained’
The terms ‘received or receivable’ used in Section 165A ought to be understood as receipt of such amount that will also be retained by the e-commerce operator. Mere collection of the amount on behalf of another person for onward remittance to such person would not mean that the amount has been received by the e-commerce operator.
Courts have interpreted the terms ‘collected any amount’ in the context of service tax. It has been held[2] that ‘collected’ means ‘collected and kept as his’.
Accordingly, placing reliance on the said judgments, it can be argued that EL is to be charged only on the amount collected and retained by the e-commerce operator as commission.
- Charging provisions are to be interpreted strictly and narrowly
It is now a settled law in the domain of taxation that charging provisions of the taxing statutes are ought to be interpreted strictly. Liberal construction which expand or enlarge the scope of the levy has been held to be impermissible.
In the present context, Section 165A when read literally or interpreted strictly leads to the conclusion that only the commission amount retained by the e-commerce operator for providing the facilitation services is subject to the levy.
If at all the charging provision is capable of being interpreted strictly/ narrowly as well as broadly, the narrower view which restricts the scope of the levy should be adopted.
In the present context, since View II is a possible view and narrows down the scope of the levy, the same should be adopted.
- No occasion to refer to external material like BEPS Action Plan 1 when literal interpretation is possible
It is the cardinal principle of statutory interpretation that the words of any statute must be literally interpreted and unless such interpretation results in any absurdity or ambiguity, reference cannot be made to any other external material for aiding interpretation. As already mentioned, literal interpretation of the provisions is very much possible and the same cannot be said to be leading to absurdity.
There is no basis to say that India had accepted the recommendations or suggestions of the BEPS Action Plan 1 in its entirety or that the present EL is exactly in line with the suggestions given in the Action Plan. On the contrary, the provisions of EL introduced by India are quite unique and different in its scope (including the definition of e-commerce operator and supply).
- View I leads to an absurd construction with regard to an Indian vendor
The 2020 Levy is triggered if the e-commerce operator is a non-resident and the end customer is a resident of India. The levy will be attracted even if the vendor is an Indian resident. In such cases if EL is levied on the gross booking amount in the hands of the e-commerce operator and thereafter, the net booking amount is also subjected to tax in the hands of resident vendor as his income tax, the net booking amount would suffer tax twice. When compared to a non-resident vendor whose net booking amount would not be subjected to income tax in India, the resident vendor will stand to lose. This may not have been the intent of the legislature.
Conclusion
Considering the strength of arguments available in support of both views, the tussle between the taxpayer and the taxman on this issue would definitely be an interesting one to watch out for in the near future.
[The author is a Senior Associate in Direct Tax Team, Lakshmikumaran & Sridharan Attorneys, New Delhi]
[1] The new equalization levy is imposed on non-resident e-commerce operators.
[2] R.S. Joshi and Ors. v. Ajit Mills Limited and Ors. - AIR 1977 SC 2279.
