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India introduced ‘Equalisation Levy 2.0’ (EL 2.0) vide Finance Act 2020, beginning 1 April 2020. The levy is applicable on non-resident e-commerce operators (ECO) for consideration received from supply of goods or services (except for online advertisement already covered by EL 1.0 introduced in 2016). The ECO is required to collect and deposit the taxes with the government. EL 2.0 is applicable to ECO having sales, turnover, or gross receipts of INR 20 million in a financial year.
Several questions have since cropped up, and various interpretational issues have arisen, pursuant to the widening of the EL provisions. While the Finance Act 2021 has provided clarity on some of the concerns raised by various stakeholders, this article covers other issues that still need to be addressed under EL 2.0.
The classification of income as royalty/ fees for technical services (FTS) or business income has been a subject matter of prolonged litigation. Royalty and FTS are subject to withholding tax on gross basis i.e., on the total amount of Royalty / FTS. However, if an enterprise has a Permanent Establishment (PE) in the other country, then such income is taxable as business profits on net basis i.e., after claim of allowable expenses.
In a situation where the taxpayer considers a transaction as covered by EL provisions, and during assessments the same is characterized as royalty / FTS by the tax authorities or later during the course of litigation by the courts, the present provisions are silent on the treatment of EL already paid by the taxpayer.
The question is whether the EL paid by the enterprise shall be allowed as credit against the tax liability arising on account of taxability as Royalty/FTS or refunded to the taxpayer. Further, if it is to be refunded, what is the mechanism to claim such refund.
The question whether the ECO will be eligible to claim the FTC of EL paid will depend on the local tax laws in home jurisdiction. It is pertinent to note that taxes covered under the respective Double Taxation Avoidance Agreements (DTAA) entered between India and foreign countries have been specifically defined and generally do not cover the EL. Therefore, it is likely that the tax credit may not be available for the EL paid in India, because EL has been introduced as a separate Chapter in the Finance Act and does not form part of the Indian Income Tax Act, 1961 (ITA).
In case of countries with which India does not have a DTAA , if the home country jurisdiction of ECO recognises EL as a type of direct tax and entitles the ECO to claim FTC, the ECO may be able to claim it. Where EL 2.0 is not creditable in the home country, it would be a sunk cost in the hands of the non-resident ECO.
The EL 2.0 provisions do not provide any exemption for inter-company/ intra-group transactions. There are differing viewpoints as to whether inter-group services would fall within the ambit of this levy, particularly in a situation where there is no mark-up. There may be cases where the digital facility is maintained for commercial purposes i.e., services are provided on a cost-plus markup basis and there may also be cases where the entity
recovers only the cost incurred in maintaining such facility from other group entities. There could be cases where an entity within a group is only accumulating and distributing the costs incurred (including third party) towards certain digital services availed by group entities. The present scope of EL 2.0 is widely worded and could cover such inter-company transactions provided they qualify within the definition of ‘ECO’ and ‘e-commerce supply or services’ as provided in EL laws. Accordingly, such cross charges of inter-company/intra-group support services requires careful consideration.
Transaction(s) between two non-residents where either the marketplace is in India, or the IP address is in India have been brought under the ambit of the EL 2.0. This could cover transactions of a non-resident tourist purchasing goods or services on a non-resident operated e-commerce platform using an Indian IP address. Implementation of EL on such transactions purely based on IP addresses may pose a challenge for various stakeholders.
Another key issue is around the scope of the term ‘digital or electronic facility or platform’ – neither the EL law nor the ITA defines or explains this term.
As per Merriam Webster Dictionary:
Each definition is referring towards automatic or minimal human intervention.
OECD BEPS Action Plan 1 observed that “E-Commerce platforms typically operate the web stores where products are displayed, and purchasers can make their orders...". OECD in its report ‘An introduction to online platforms and their role in the digital transformation’ describes an online platform as a “…. digital service that facilitates interactions between two or more distinct but interdependent sets of users (whether firms or individuals) who interact through the service via the Internet". Hence, a view may be possible that the expression ‘digital’ or ‘platform’, in the context of EL 2.0 provisions, refers to marketplace that facilitates exchange between different types of persons who could not otherwise transact with each other.
In the absence of any definition, the term is capable of being interpreted in different ways and can potentially cover ubiquitous digital communication tools like emails or calls. There is a need to clarify the scope of the term digital or electronic facility or platform, to address the prevailing ambiguities.
The term ‘goods’ and ‘services’ have neither been defined under the Finance Act nor the ITA. This leads to interpretational issue on the scope of the term of ‘goods’ and ‘services’. A clarification in this regard can be issued to address the concern faced by taxpayers.
India has gained traction as an investment destination, with a large consumer base. Recent steps taken by the government on tax and regulatory front have also been welcomed by foreign investors. Although, future of EL 2.0 depends on the adoption of OECD Pillar 1 and 2 amendments by India, the EL 2.0 law currently in force requires clarity. FAQs on various issues discussed above can assist the taxpayers in adopting appropriate position, due compliance and avoid unwarranted litigation.
This article was originally published in Mint.