The 2020 Budget has extended the ambit of equalisation levy to non-resident e-commerce operators, signifying yet another step by India in its move to tax digital businesses.
Equalisation levy has its genesis in the G20/OECD BEPS Action 1, as one of the potential measures to tax digitised businesses that earn significant revenues from a jurisdiction without any physical presence therein. However, it was not a ‘recommended’ option as per the G20/OECD. Taking a cue from BEPS Action 1, the Report of the Committee on Taxation of E-Commerce was published in early 2016 which promulgated the introduction of equalisation levy in India. Soon thereafter, equalisation levy was introduced in the 2016 Budget at the rate of 6 percent to tax non-residents engaged in online advertisement and related activities. The scope has now been widened significantly in the 2020 Budget.
Enhanced scope of equalisation levy
Effective 1 April 2020, equalisation levy is payable by a non-resident e-commerce operator at the rate of 2 percent on consideration from e-commerce supply or services to (i) an Indian resident; or (ii) a non-resident in specified circumstances (sale of advertisement/data); or (iii) a person who buys goods or services using internet protocol address located in India. The equalisation levy is not applicable where the e-commerce operator has a permanent establishment in India, or where the turnover is less than Rs 2 crore during the financial year.
The definition of the terms ‘e-commerce operator’ and ‘e-commerce supply and services’ are very wide and may cover various digital transactions and services that go beyond the scope of equalisation levy or digital services tax introduced in other countries. Given the potential wide scope of equalisation levy, there are several issues open to interpretation, and taxpayers have been expecting clarifications from the government on several issues; no clarification has been issued so far.
Interestingly, the equalisation levy provisions are not part of the income-tax law, and accordingly, taxpayers may prima facie not be able to claim tax treaty benefits in relation to the equalisation levy. Consequently, there may be challenges for such taxpayers to get credit for equalisation levy in their home jurisdiction.
One may also note at this juncture that India has introduced the concept of ‘significant economic presence’ in the income-tax law to tax digital companies – however, practically this may not be very effective until tax treaties introduce this (or a similar) concept.
As part of the BEPS project, the OECD is working towards a consensus-based solution comprising of two pillars: (i) Pillar One focused on nexus and profit allocation; and (ii) Pillar Two focused on a global minimum tax intended to address remaining BEPS issues. These rules are likely to significantly impact digital companies, and it was initially targeted that OECD would come out with the common tax framework by the end of this year. However, due to the disruption caused by the COVID-19 pandemic, the target date for global consensus has been pushed to mid-2021.
The delay in consensus for a global framework has led countries across the world to implement unilateral measures for taxing digital companies. This trend is led by European countries such as Austria, France, Hungary, Italy and the United Kingdom who have implemented a digital services tax or a digital advertisement tax, although the legislation or collection has been delayed in a few cases. Such a tax is typically being contemplated by countries in the European Union, as well as countries such as Australia, Brazil, Israel, New Zealand, etc. Accordingly, India is not unique in taxing digital businesses and is broadly aligned with most countries on its thinking around a digital tax.
The United States has a different perspective on digital taxes. The United States Trade Representative has initiated investigations in relation to India’s equalisation levy, as well as digital services tax introduced by various other countries and the European Union. India in its response to the investigations has responded by stating that the equalisation levy is not discriminatory and that it is consistent with India’s commitments under the WTO and international taxation agreements.
Let us first understand how collections on equalisation levy are shaping up in India. Media reports indicate that the equalisation levy collection after the second instalment deadline of October 7, 2020 is Rs 738 crore. The corresponding amount last year was Rs 545 crore, when the only online advertisement was covered within the purview of the equalisation levy. In view of the COVID-19 pandemic, one will need to monitor these numbers for a few more quarters before a clear trend emerges in relation to additional tax collections, pursuant to the widening of the equalisation levy provisions.
It is expected that when there is a global consensus on Pillars One and Two as part of the OECD project, the Indian equalisation levy will be withdrawn, as it is an interim measure. As mentioned earlier, the target date for global consensus is mid-2021 and even if this deadline is met, the implementation, especially of Pillar Two, is going to be fairly complex and is expected around 2024. Given the fact that many countries have implemented, or are in the process of implementing, a digital services tax, it appears that unilateral measure to tax digital services is not going away any time soon. The question that only time can answer is whether equalisation levy and digital service tax will gradually become the ‘new normal’ for taxing cross-border digital transactions?
—Pritin Kumar is a Partner and Anil Kadam is a Senior Manager with Deloitte Haskins & Sells LLP. The views expressed are personal
(Edited by : Ajay Vaishnav)