India imposes Digital Services Tax in the Form of Equalisation Levy 2.0 for FY 2020-21 onwards!

Background

While the solution for the problem of digital taxation is yet to be achieved at the global level through the Organisation for Economic Co-operation and Development, what is happening currently is that given revenue considerations, many countries have started taking unilateral actions by way of taxing digital transactions at their own behest. This is ushered by their belief that people of these countries contribute to the profits of companies operating digitally through another jurisdiction and accordingly the government treasury should have a share in the profits these companies derive from their people. 

When France started the fashion by imposing a 3% tax on global revenue generated by companies providing digital interface services to French users, the US retaliated by threatening to impose a huge tariff on French goods pursuant to which both the nations decided to delay the imposition of levy and reach for a global consensus on the matter.

Nonetheless, there are countries which have already introduced such levies including India. While India has levied 2% Digital Services Tax on e-commerce supply and services, Austria has introduced a 5% tax on revenue from online advertising services. Further, Italy has put a 3% tax on revenue from targeted advertising and digital interface services while on the other hand, Turkey has put 7.5% tax on similar services including social media. In the UK, the government has introduced a new 2% tax on the revenues of search engines, social media services and online marketplaces which derive value from UK users.

There are other countries following the league and planning to introduce such levies in the near future. These include Brazil, Czech Republic, Spain. Brazil is considering progressive taxation on gross revenue from digital services provided by large technology companies. Further, the Czech Republic and Spain are considering taxing targeted advertising and digital interface services at tax rates of 7% and 3% respectively.

In India, this thing came as a surprise for all concerned as while there was no mention in the Budget Speech, the said levy was silently approved by both the houses of the Parliament and came into being with the passage of the Finance Act, 2020. 

In India, the first attempt towards taxing digital presence was made in 2016 when ‘Equalisation Levy’ (‘EL’) was introduced by the Finance Act, 2016  @ 6% on consideration received by a non-resident on certain ‘specified services’ which were primarily online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement.  

Through the Finance Act, 2020, the scope of EL has been significantly widened to cover consideration received by non-resident ‘e-commerce operators’ engaged in ‘e-commerce supply or services’.  For these purposes, ‘e-commerce operator’ is 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.  Further, ‘e-commerce supply or services’ has been defined as:

  • online sale of goods owned by the e-commerce operator; or 
  • online provision of services provided by the e-commerce operator; or
  • online sale of goods or provision of services or both, facilitated by the e-commerce operator; or 
  • any combination of activities listed above

Scope of the new levy – what’s covered and what’s not?

Lets have a quick look as to what the new levy has in store:

InclusionsExclusions

Under the new provisions, it has been provided that w.e.f. April 1, 2020 Equalisation levy @ 2% be charged on the amount of consideration received/ receivable by a non-resident ‘e-commerce operator’ from ‘e-commerce supply or services’ made/ provided/ facilitated by it

  1. to a person resident in India; or 
  2. to a non-resident in below-mentioned circumstances:
    1. sale of advertisement which targets customers resident in India or a customer who accesses the advertisement through internet address protocol (IP address) located in India; and
    2. sale of data, collected from a person resident in India or from a person who uses IP address in India; or 
  3. to a person who buys such goods or services or both using IP address located in India

Certain circumstances have been prescribed wherein the Equalisation levy would not be charged which are enlisted as follows: 

  1. wherein the non-resident e-commerce operator has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment; 
  2. where the equalisation levy is leviable @ 6% on specified services enlisted above; or 
  3. the sales, turnover or gross receipts of the e-commerce operator from the e-commerce supply or services is less than two crore rupees during the previous year.

Food for Thought ?

1. Is this Digi-Tax virtually taxing everything under the digi-net?

It appears from the way the terms ‘e-commerce operator’ and ‘e-commerce supply or services’ have been worded that probably the intent of the tax authorities is to bring into the tax net anything and everything that happens over digital space. These definitions travel beyond the normally understood connotation of marketplace intermediaries and aggregators. The potential extent of the new levy could include digital/ online services provided by multinational enterprises to their Indian group entities, such as transactions involving data centre operations, network security services, etc, which are facilitated by a non-resident entity through a digital or online platform owned, operated or managed by it. In today’s highly digitized world, it needs to be acknowledged that a bulk of businesses have a website or avail of some electronic facility for undertaking transactions and payments, hazarding them to get covered under the newly defined terminology of an ‘e-commerce operator’. 

An indicative list of businesses intended to be covered could include non-residents operating as online marketplaces, travel aggregators, market research platforms, subscription-based platforms, including social media, cloud services, software services, search engines, dating and matrimonial services, streaming and online gaming, music, movies, books, international tours and travel, hospitality, online card payment networks, cross border money transfer service providers, e-wallets, payment banks, etc.

Given such a wide coverage makes one ponder if precisely no stone has been left unturned by the tax authorities to virtually cover all types of e-commerce transactions that have some nexus with India.

2. Is Equalisation Levy an additional burden on international businesses ?

It is worthwhile to note that no credit for Equalisation Levy would be available to the non-resident e-commerce operator as it is a separate levy which is not under Income-tax and hence will not be covered by the treaty protection. Thus, this levy is an additional cost to international businesses. This Equalisation levy of 2% has to be discharged by the non-resident e-commerce operator irrespective of its profits, which may result into a substantial amount of cash outflow and accordingly will add to the burden for e-commerce companies. Further, new systems have to be put in place in order to ensure compliance under the new levy. 

3. Issues for the Government

Also, for the Indian government, ensuring compliance from the non-resident e-commerce operators is going to be a difficult bet as it is always easier to catch hold of the resident counterpart to any transaction rather than the non-resident party. Also given that a levy is a unilateral act by the Indian Government, it would be difficult to ask for support from the government authorities of the other countries to help ensure compliance by the non-resident parties who eventually default.

4. Clarity on certain issues awaited

Apart from the above, there are certain areas that require clarification. One is whether the threshold of INR 2 crores is to be seen in respect of revenues earned globally or the revenues derived from the Indian jurisdiction. Further, for persons such as marketplace operators and aggregators, clarity is needed on whether ‘consideration’ represents the gross value of the goods/ services or only the commission/ margin of the e-commerce operator.

Also, while the provisions relating to the Equalisation Levy on non-resident e-commerce operators are applicable w.e.f. April 01, 2020, however, Section 10(50) of the Income Tax Act, 1961 has been amended only w.e.f. April 01, 2021, to exempt from tax any income arising from any e-commerce supply or services on which Equalisation Levy is chargeable. Accordingly, clarity from the government on this one-year gap between the enforceability date and income tax exemption date is required.

New onus w.r.t. compliance

The new levy has new compliance requirements and timelines. We would be happy to guide you and assist you through the process. For knowing more about the same, please feel free to reach out to our team by clicking here



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