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The Organisation for Economic Co-operation and Development (OECD) had earlier released its recommendations on Base Erosion and Profit Shifting (BEPS) Action Plan 1, to address tax challenges of digitisation of the economy.
Based on these recommendations, India was one of the first countries, to introduce digital tax under its domestic law. This was a unilateral step to tax digital transactions and was meant to be an interim measure in the absence of a global consensus-based solution.
Digital tax was introduced in 2016 in India in form of a 6% levy on online advertising. Finance Act 2020 further expanded its scope and introduced Equalisation Levy (EL 2.0) of 2% on payment for e-commerce supply of goods or services, provided or facilitated by non-resident e-commerce operators.
It has been two years since the introduction of EL 2.0, however, stakeholders are still grappling with many unresolved issues that require clarity.
It is pertinent to note that some of the words and phrases have not been defined, thereby leaving room for different interpretations, and possible disputes and litigation in future. For example, who is an e-commerce operator? Under the EL 2.0 provisions, it means 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. These key terms, which are critical for the effective implementation of this levy, are not defined.
Another important issue is the scope and coverage of these provisions. One school of thought is that current provisions are wide enough to cover the sale of goods or services carried out through telephonic medium or through e-mail or for that matter, physical import of goods. The other school of thought seems to suggest the opposite.
There is no specific carve-out for the intra-group cost recharges, reimbursements, and similar transactions, which are common transactions in large business groups. In addition, the due date of payment of EL 2.0 for the last quarter is March 31, which makes compliance practically difficult and administratively inconvenient. Thus, these are some of the issues that require attention and clarity.
Recently, the OECD/G20 nations have agreed to a two-pillar solution to address the tax challenges arising on account of the digital economy and evolving business models.
Of which, Pillar One seeks to re-allocate taxation rights to market jurisdictions where consumers/users are based.
This has been a long-standing demand of countries like India which have been seeking taxation rights based on the market potential it offers for global digital companies, irrespective of such companies having no or limited physical presence in India.
These provisions are expected to be implemented over the next two years and will necessitate phasing out of unilateral digital taxes like the Equalisation Levy.
Last year, United States Trade Representative (USTR) had proposed to impose additional tariffs of up to 25% ad valorem on Indian goods on the premise that India's EL 2.0 is discriminatory, unreasonable, and burdens or restricts US commerce.
In November 2021, an agreement was reached to suspend this additional tariff till the implementation of Pillar One or March 31, 2024, whichever is earlier.
Under this arrangement, it is expected that the US companies may get credit for EL 2.0 accrued during the interim period (i.e. 1 April 2022 till implementation of Pillar One or March 31, 2024, whichever is earlier) against future taxes as per Pillar One. The terms of this agreement are to be finalised soon.
The EL. 2.0 digital tax is here to stay for some time, till Pillar One is implemented globally. All eyes are on Budget 2022, to see if it lays out the roadmap for India's plans for phasing out of EL 2.0 provisions and granting credit against Pillar One liability.
Even if these changes are not brought in this year's Budget, at least clarity should be provided on some of the interpretational issues being faced by taxpayers as highlighted above.
Since EL 2.0 is an interim measure, it should remain so without adding to the disputes and litigation, which could be easily avoided through appropriate clarifications, and this year's Budget is a good opportunity to address some of these issues.
This article was originally published on Business Today.