Taxation of the digital economy is one of the most significant areas being dealt with as part of the OECD’s base erosion and profit shifting (BEPS) project. In this regard, although various measures were considered as part of the BEPS report, none of them were recommended due to the expectation that other measures developed as part of the BEPS project will mitigate some of the tax challenges posed by the digital economy. Whilst a consensus-based solution is expected to be developed by the end of 2020, several countries have announced various interim measures seeking to tax transactions arising on account of modern-day digital commerce.
Over the years, India has made significant changes to its domestic tax law in order to ensure that it receives its fair share of tax with respect to the digital economy. Some of the key changes include the amendment to the definition of ‘royalty’ in 2012, the introduction of the equalisation levy in 2016, amending the definition of ‘business connection’ to include a significant economic presence in 2018, and introducing withholding tax on domestic e-commerce transactions in 2020.
India extends the scope of equalisation levy
Recently, India expanded the scope of equalisation levy to include cross-border e-commerce transactions within its ambit. As per the new provisions, any e-commerce operator who is engaged in e-commerce supply or services is liable to pay 2% of the amount of consideration as equalisation levy to the Indian exchequer. The definitions of ‘e-commerce operator’ and ‘e-commerce supply or services’ are very wide and can have potentially far reaching implications for transactions which may not be regarded per se to be in the nature of e-commerce as understood in common parlance.
For ease of reference, the key contours of the equalisation levy, as applicable to non-resident e-commerce operators, are tabulated below:
·Applicable to a
non-resident e-commerce operatorwho is engaged
in e-commerce supply or services
Specified services on which equalisation levy applies
·Online sale of goods owned
by the e-commerce operator;
·Online provision of
services provided by the e-commerce operator;
·Online sale of goods or
provision of services (or both), facilitated by the e-commerce operator; or
·Any combination of the activities
·Any person resident in
·Any person who buys goods
or services (or both) using an internet protocol (IP) address located in
·Any non-resident in
respect of offshore purchases of advertisements which targets Indian
·Any non-resident to whom
data is sold which is collected from an Indian resident or from a person who
uses an IP address located in India.
Rate of equalisation levy
Person responsible for paying equalisation levy in India
Exemption from equalisation levy
Exemption is provided, inter alia,
in the following cases:
operators with a permanent establishment (PE) in India and where the e-commerce
transaction is effectively connected to said PE in India; or
·Cases where the aggregate
value of consideration for the specified transactions does not exceed INR 20
million ($265,000) in a year.
It should be noted that the equalisation levy provisions cast an obligation on the non-resident e-commerce operator to pay equalisation levy within the applicable due dates on a quarterly basis. They are also required to file an annual statement in respect of all such transactions conducted on or before June 30 following the end of the Indian financial year which runs from April to March. Failure to comply with the provisions (such as failure to deduct or pay the equalisation levy) attracts interest and penal consequences. Prosecution proceedings can also be invoked by Indian Revenue in certain circumstances.
While the equalisation levy applies with effect from April 1 2020, the corresponding exemption from income tax in the hands of non-residents applies only from April 1 2021.
The practical challenges posed by the implementation of equalisation levy have been exacerbated because there is very limited guidance available in statute on a number of issues. For instance, in a marketplace model, the way the provisions are worded seems to suggest that the equalisation levy applies to the entire gross amount of consideration received by the marketplace operator and not just on the commission or service fee retained by it. Secondly, what constitutes a digital or electronic facility/platform is left open for interpretation. Indian Revenue could even argue that advice provided by a non-resident via email or telephone also constitutes e-commerce supply or services, hence being liable for equalisation levy. Thirdly, there is no exemption provided for inter-company transactions.
The OECD’s interim report on taxation of the digital economy stated that any interim measures which may be implemented by any country ought to be in compliance with their international obligations, including tax treaties. However, given that equalisation levy is not a part of India’s domestic tax law (it was introduced as a separate chapter in the Finance Act), non-residents would not be entitled to tax credit in their home jurisdiction.
Furthermore, the scope has been expanded significantly to cover a wide range of sale, service and facilitation transactions that are conducted online through a digital or electronic facility or platform. The provisions are drafted in a manner which targets not only highly digitalised business models, but also a number of routine transactions of a multinational group.
Indeed, digitalisation has disrupted businesses by providing opportunities for new-age businesses and evolving business models. The digital economy is swiftly becoming intertwined with the traditional economy, thus making it harder to create a clear delineation of a digital economy’s true meaning. In an Indian context, the e-commerce market is expected to grow to $200 billion by 2026. India has been at the forefront in terms of taxing the digital economy and the factors mentioned above may pose significant challenges for businesses. Globally, several countries have introduced similar tax proposals (e.g. equalisation levy) for the taxation of the digital economy.
Whilst tax law continues to evolve, businesses will need to constantly reassess their operating models in order to assess impact, identify risks, explore planning opportunities, and meet their obligations.
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