Equalization levy: A new tax regime that has its own set of challenges
8 min read . Updated: 06 Aug 2020, 04:06 PM ISTUnder EL 2.0, no distinction has been carved out between a resident and a non-resident
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Digitalization is one of the most significant developments since the Industrial Revolution, which has virtually transformed the way in which businesses are carried out, across the globe. The traditional brick and mortar business models are slowly and steadily paving way for newer businesses and unique ways of doing exciting businesses. Some studies have estimated that global digital economy was worth $11.5 trillion in 2016 (Digital economy report–Value creation and capture: implications for developing countries) and for India, it was estimated to be $200 billion annually (Report of ministry of electronics and information technology-India’s Trillion Dollar Digital Opportunity, February 2019). However, it has been felt that taxation laws which are based on the traditional business models have been struggling to keep pace with these changes. This has resulted in many transactions completely escaping the tax net. Hence, the need was felt to address the challenges posed by the digital economy.
The OECD initiatives
In this backdrop, OECD and the G-20 group initiated the Base Erosion and Profit Shifting (BEPS) project, to inter alia, address the taxation issues of digital economy. The outcome was BEPS Action Plan 1, which was released in October 2015. It proposed three interim options to tackle the issues emerging from digital transactions.
a) Significant economic presence;
b) Withholding tax on digital transactions; and
c) Equalization levy
Countries were at liberty to adopt any of these options, till a global consensus emerged. Post this development, several countries such as Russia, UK, France, Italy and India have introduced digital tax or equalization levy in different formats, to suit their respective requirements.
The Indian journey
India being one of the early movers, introduced equalization levy (EL 1.0) in 2016 at 6% on payments received by a non-resident service provider from an Indian resident (carrying on business or profession) in respect of online advertising, provision of online advertising space and related services.
Finance Act 2020 has further expanded the scope of equalization levy to non-resident e-commerce operators by introducing a new levy of 2% (EL 2.0). This levy is effective from 1 April 2020. While EL1.0 was limited to B2B transactions and compliance was required to be carried out by the payer, in case of EL2.0, both B2B and B2C transactions are covered and compliances are to be carried out by the non-resident e-commerce operator.
EL 2.0: Scope and compliances
Under the new provisions, an e-commerce operator has been defined as ‘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. Further, e-commerce supply or services implies:
a. online sale of goods owned by the e-commerce operator
b. online provision of services by e-commerce operator
c. online sale of goods or provision of services facilitated by the e-commerce operator or any other combination of these activities
This levy of 2% would be applicable on the consideration for e-commerce supply or services provided or facilitated by the non-resident e-commerce operator to:
a) any person resident in India;
b) non-resident in certain specified circumstances; and
c) any person who buys such goods or services or both using internet protocol (IP) address in India.
It is pertinent to note that under EL 2.0, no distinction has been carved out between a resident and a non-resident. Further, certain non-resident to non-resident transactions have been specifically included within the purview of EL 2.0, as below:
a) Sales of advertisement targeting a customer, who is a resident of India or who accesses such advertisement through an IP address located in India;
b) Sales of data collected from a person resident in India or from a person who uses IP address located in India.
Certain carve-outs have also been provided. Accordingly, EL 2.0 would not be applicable in the following scenarios:
a) The non-resident e-commerce operator has a permanent establishment (‘PE’) in India and the supply or services is effectively connected with such PE in India. This effectively covers a situation where the non-resident would in any case be paying taxes in India on its net income.
b) Sales / turnover of the e-commerce operator does not exceed `20 million during the relevant financial year, thus providing relief to small players or those having limited nexus with India.
As in case of EL 1.0, treaty benefit would not be available to the non-resident e-commerce operators in case EL 2.0 as well. However, they could evaluate if any tax deduction is available, under their home country’s domestic tax law.
EL 2.0 is required to be deposited on quarterly basis in accordance with the following timelines:
1. For quarter ending 30th June, the due date of payment is 7th July
2. For quarter ending 30th September, the due date of payment is 7th October
3. For quarter ending 31st December, the due date of payment is 7th January
4. For quarter ending 31st March, the due date of payment is 31st March
An annual statement is required to be filed by the non-resident e-commerce operator on or before 30 June, following the relevant financial year.
Interpretation and challenges
Currently, the way EL 2.0 provisions are worded, there is ambiguity as regards its scope and there are numerous interpretational issues leading to practical challenges in compliance. Some of the key issues being confronted by the e-commerce operators are:
a) What is implied by the term ‘online sale of goods’ or ‘providing online services? In other words, how to deal with situations where only one leg of the transaction is online and the other happens in a physical form? For example, can it possibly take within its ambit cases where services are booked online but are provided or carried out offline? Consider a situation where booking of a hotel is done online but actual services of the hotel stay are availed offline. Would such cases also be covered?
b) Does it cover within its ambit sales of goods or services carried out through telephonic medium or through e-mail? How should one construe the term ‘digital or electronic platform’?
c) How about the sales returns? Are sales numbers to be reduced with any sales return, which is a very common feature in online sales?
d) In case of e-commerce operators, who do not sell their own goods or services but merely act as facilitators, would EL 2.0 be levied on their commission income or on the total consideration involved in sale of goods or services? If the sales consideration flows directly to the actual seller from the buyer, how will this levy be recouped and deposited by e-commerce facilitator?
e) In case of software, is there a need to treat licensing arrangements differently from an outright sale, or will both fall within the purview of EL 2.0?
f) Would the online purchases of goods and services made at the group level and charged back to the Indian group entities be covered? An Indian entity may procure online services directly from a third-party online service provider or it could be done through a group entity at the regional level. The group entity at regional level may do so to ensure cost effectiveness and then charge it to the other entities in the region. In such cases, the question would be, could a change in the manner a transaction is effectuated, change its substance, and alter the answer to the question.
g) There is carve-out provided for e-commerce operators who have a PE in India, but clarity is required on the type of PE, i.e. fixed place PE, service PE or agency PE.
h) In case any tax, duty or other levy is part of the invoice, should EL 2.0 be charged on that as well?
Adding to the confusion is the fact that the law provides that if a transaction is covered by EL 2.0 provisions, it would not be subjected to withholding tax. However, it seems due to some drafting anomaly this is applicable from 1 April 2021. So, the issue being that during this initial year of operation of EL 2.0, one transaction could be subjected to both this 2% levy and withholding tax. This should be addressed on an urgent basis.
From a practical perspective, there is a concern that as the due date for payment for the last quarter is 31 March itself, compliance within the stipulated time would become very cumbersome. More so, as any true up required for the year in question, may also need to be effectuated in this quarter. Any delay would involve interest costs.
There are time and cost challenges in building or modifying the IT infrastructure required to enable the non-resident e-commerce operators to track transactions that may have targeted Indian residents or any person using Indian IP address.
Way forward
Due to the interpretational issues involved, there was an expectation that this levy would be deferred till detailed clarifications are issued. This would have given stakeholders adequate time to make suitable changes in their IT systems to identify and capture the requisite transactions and obtain necessary tax registrations in India. However, the form to deposit the levy was released just before the first quarter payment due date, leading to compliance challenges.
It is desirable that adequate clarifications addressing the concerns of various stakeholders are issued so that compliances can happen in a timely manner and any litigation at a later stage on interpretational issues is avoided.
Richa Sawhney and Sameer Shah contributed to this article.
Vikas Vasal is national leader-tax at Grant Thornton India LLP .
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