Business environment has undergone a drastic change i.e. from the traditional ‘physical system’ to the modern ‘digital system’. With user/ consumer facing countries devising measures to tax digital businesses, the International tax landscape is certainly undergoing a renovation.
It was in this backdrop, that the BEPS project, an initiative by OECD and G20, inter-alia, released theAction Plan 1, which though fell short of providing a concrete solution, provided probable measures which may be taken by countries to tax digital businesses.
Since then, OECD has been steadily progressing towards building a ‘Unified Approach’ for taxing digital economy and is expected to come up with a Global solution by December 2020, which considering the present scenario of pandemic, may get delayed even further. The time taken by OECD has tested the patience of the consumer/ user facing countries, so much so that they probably thought it best to come up with unilateral measures to tax companies having digital presence. The measures recommended in the Action Plan 1 have acted as a guiding tool for these countries to structure their tax laws in this regard.
India was one of the first countries to implement a digital tax levy called the ‘Equalization levy’ in the year 2016. Soon, countries such as France, UK, Italy etc., also followed India, to implement a similar levy in their jurisdictions. Being the leader, one could have certainly expected India to remain one step ahead of its followers. By broadening the scope of equalization levy (being the subject matter of discussion in this article) in its Finance Act, 2020, India has certainly lived up to those expectations.
How has India progressed to introduce Equalization Levy?
Drawing an inference from BEPS Action 1, India had introduced Equalization levy in the year 2016 (‘2016 Levy’). This levy was limited to only non-resident companies engaged in providing specified service(i.e. online advertisement, digital advertising space). The obligation to pay taxes was interestingly (similar to reverse charge mechanism in indirect taxes) cast on the service recipient, although he was permitted to deduct the same from the payments made to non-resident providing specified services.
With Finance Act, 2020, the scope of 2016 Levy has been broadened with effect from 1st April 2020. Though the implementation of ‘Significant Economic Presence’ was deferred in sync with OECD’s timelines, no whisper about introduction of anything in its place could be heard at the time of Budget proposals. However, much to the surprise of everyone closely tracking developments on tax front, the new levy has silently made its way as part of changes to Finance Bill before it was passed by the Parliament.
What is the new Equalization levy all about?
A Levy of 2% has been imposed on the ecommerce operator who receives any consideration for e-commerce supply or services (greater than INR 2 Cr in aggregate) from:
- Indian Resident;
- Person using Indian IP Address for buying such supplies or services;
- Non-resident – only in the following cases:
- Sale of advertisement – targeting Indian Resident or Indian IP User
- Sale of data – collected from Indian Resident or Indian IP User
Unlike the 2016 levy, in this new levy, the responsibility to pay levy has been casted upon the non-resident ecommerce operator. For any non-payment, the non-resident will be liable to pay interest @ 1% per month and penalty equal to the amount of equalization levy that remains unpaid. Penalty may be waived if ecommerce operator proves that there was reasonable cause for such failure.
Being a levy introduced, not through the Income Tax Act, rather through the Finance Act, 2016, any amount paid by a non-resident ecommerce operator would remain cost to him, which shall not be eligible for any credit in its country of residence.
Is the scope of the levy too wide?
To ensure that no stone remains unturned to tax digital transactions, the levy seeks to cover all those e-commerce transactions that seem to have some nexus with India. Also, the meaning of ‘e-commerce operator’ and ‘e-commerce supply or services’ as coined by Taxman further vindicates the intent to tax anything and everything happening over the digital space.
‘E-commerce operator’ has been defined to mean a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both. ‘E-commerce supply or services’ covers online sale of goods or services owned or facilitated by the e-commerce operator.
The aforesaid definitions not only cover operators who act as facilitators for an online transaction, but also covers ecommerce players who are resellers or manufacturers or service providers. If any transaction is taking place through a digital platform/ electronic facility which is owned, managed or operated by e-commerce operator, all such transactions are included in the ambit of this new equalization levy. Interestingly, even such transactions where the buyers and sellers happen to be Indian residents, and the goods are sold online through digital platform of non-resident ecommerce operator, will also be covered by the new levy.
The term ‘digital or electronic facility or platform’ has not been defined and so is the term ‘online’. A question arises as to whether any sale through emails, telephone, etc., would also be covered within the ambit of this new levy. Similarly, if a manufacturer is habitually concluding contracts only by mail, can it be said that he has an ‘electronic facility or platform for online sale of goods or provision of services?
Although no discussion in this respect is there in the newly introduced provisions, guidance can be taken from BEPS Action Plan 1, which is one and probably the only source of inspiration for enactment of equalization levy.
The Action Plan discusses on the digital transactions that can be said to be taking place through digital platform. It seeks to cover specifically those transactions where conclusion of a contract for the sale is effectuated through a digital platform, where the contract conclusion primarily relies on automated systems. Orders concluded through email, or over telephone, where there is human intervention, are kept out of the purview of transactions happening over digital platform.
Food for thought
Taking cue from the Action Plan, it can be said that the intention of Indian Taxman may also be to cover only such automated transactions as discussed in Action Plan and not anything and everything happening online. However, as we all know, the interpretations that may be given or the arguments that may be put forth taking guidance from the Action Plan can only have persuasive value before the Indian tax authorities. One cannot rule out that tax authorities may take on the mantle, to apply the levy to every transaction where there is an element of digital dealing. It is suggested that taxpayer seeks clarification in this respect from the taxman for clearer future.
It will also be interesting to see how the authorities in India ensure recovery of taxes from the non-residents, who do not have any physical presence in India? By enacting a unilateral measure, India may certainly not expect Government of non-resident country to share information. Will they target the Indian subsidiaries of non-residents for enforcement of this new levy? What about cases where the non-resident does not have any subsidiary, can they target the customers of the non-residents?
One has to wait and see as to how the Indian taxman goes about interpreting and enforcing the new levy.
[The author is a Senior Associate in Direct Tax Team, Lakshmikumaran& Sridharan Attorneys, New Delhi]