Indian Finance Bill 2021 appears to expand scope of the equalisation levy
Rishi Kapadia and Saurabh Shah of Dhruva Advisors discuss how the Union Budget 2021 has modified the equalisation levy and explore the changes through case studies.
As an interim measure to tax transactions arising in a digital economy, India introduced an ‘equalisation levy’ in 2016. The scope of this was expanded in 2020 to cover non-resident e-commerce operators within its ambit.
As per the expanded provisions, with effect from April 1 2020, consideration received by a non-resident e-commerce operator from an e-commerce supply or service is liable to an equalisation levy at the rate of 2%. The expression ‘e-commerce supply or service’, inter alia, includes the online sale of goods, as well as the online provision of services. An earlier article on taxing cross-border e-commerce transactions can be accessed here.
The Union Budget 2021-22, announced on February 1 2021, seeks to propose some more modifications to the equalisation levy provisions.
Changes proposed in Finance Bill 2021
The Finance Bill 2021 (the Bill) proposes the following changes to provisions of the equalisation levy, which at first, appears to expand the scope of this levy manifold:
(a) Under a market-place model, there were certain doubts on whether the equalisation levy would apply on the gross amount of sales or only on the net amount of commission retained by the market-place operator (given that that the market-place operator does not own the goods which are sold on its platform).
The Bill seeks to clarify that the equalisation levy would apply to the gross amount of consideration for sale of goods or provision of services irrespective of whether such goods or services are owned, provided or facilitated by market-place/e-commerce operator.
(b) As aforementioned, one of the prerequisites to trigger a charge under the equalisation levy is that the consideration should spring from ‘e-commerce supply or service’ which inter alia, is defined to include ‘online sale of goods’ as well as ‘online provision of services’. The Bill now clarifies that ‘online sale of goods’ and ‘online provision of services’ shall include one or more of the following online activities, namely:
Acceptance of offer for sale;
Placing of purchase order;
Acceptance of the purchase order;
Payment of consideration; and
Supply of goods or provision of services.
The Bill also clarifies that where the payment is taxable as ‘royalty’ or ‘fees for technical services’ under the act, read with the tax treaty, the provisions of equalisation levy would not apply.
The practical challenges posed by the implementation of the equalisation levy have been exacerbated because there is very limited guidance available in the statute on a number of issues. The proposed changes in the Bill can potentially make equalisation levy applicable not only to e-commerce retailers/marketplace operators, but also businesses which operate under the brick-and-mortar model with a fair degree of digitisation.
Given the broad scope as defined in the Bill, business transactions (including intra-group transactions) where only a small segment of the whole is carried out through digital means can also be potentially subjected to the equalisation levy.
Case study 1: Payment through a digital platform
Consider a situation where an Indian buyer places an order for purchase of goods through offline/physical mode with F Co/non-resident e-commerce operator. The goods are also delivered by F Co physically to the Indian buyer. The Indian buyer merely makes an online payment for the same. Applying the basic principles of international tax, this transaction should not attract any tax in India in absence of a permanent establishment of F Co in India.
However, given the expanded definition of ‘online sale of goods’, a mere payment which is made through an online mode can potentially subject the transaction to equalisation levy. The compliance obligation to discharge the levy in India is on F Co.
There could be several such instances in cases of ‘services’ as well. For example, consider booking an overseas hotel through a website. The hospitality and the services are enjoyed by the customer during his stay at the hotel overseas, and there are no services which are provided online as such. However, the fact that a mere booking of hotel takes place through online mode can make potentially make the transaction subject to equalisation levy.
Case study 2: Marketplace model – A case of double taxation?
Consider a situation wherein F Co provides their platform on a commission basis to residents as well as non-residents. While the resident seller would be liable to pay income tax in India on the profits earned by it on sale of such goods, considering the provisions of the Bill, the non-resident e-commerce operator can also be potentially liable to pay equalisation levy on the gross amount including the sales value of goods which leads to double taxation.
Also, in such cases, there is also a theoretical possibility wherein both F Co, as well as the payment gateway service provider, can be subject to the equalisation levy on the gross value of sale consideration. While this kind of situation may be regarded as unintended, the potential liability on both the non-residents (F Co as well as payment gateway provider) and the compliance obligations imposed on them coupled with the possibility of a long drawn litigation with the Revenue cannot be ruled out in absence of any clarifications from the government.
The proposed amendments which are applicable retrospectively from April 1 2020 appear to be quite wide in their ambit and may have widespread ramifications. The age-old principle of ‘doing business in India’ v. ‘doing business with India’ seem to be getting blurred by the expanded levy.
It would be helpful if appropriate clarifications are issued by the government at the earliest in order to allay several apprehensions on the scope of this levy. Businesses would need to critically assess the impact of these amendments on their operating models and monitor the compliance obligations.
Partner, Dhruva Advisors
Principal, Dhruva Advisors