Wider ramifications of Equalisation Levy 2.0
05 October 2021
While the OECD is working towards developing consensus on an inclusive framework to address tax challenges from the perspective of digitalisation of the economy, several countries have introduced unilateral measures to tax the digital economy. India was a forerunner of such unilateral approaches with the implementation of the Equalisation Levy 1.0 in 2016. In 2020, the Indian Income-tax Act expanded the scope of Equalisation Levy (commonly referred to as ‘Equalisation Levy 2.0 or EL 2.0’) as part of the Finance Act 2020. EL 2.0 was made effective on April 1, 2020. The new levy now includes a 2 per cent tax on gross revenues received by a non-resident “e-commerce operator” from the provision of ‘e-commerce supply or service’ to Indian residents or non-resident companies having a permanent establishment in India. The expression ‘e-commerce supply or service’, inter alia, includes the online sale of goods or the online provision of services or facilitation of the online sale of goods or provision of services.
Further, amendments were made in the Finance Act 2021 to clarify and expand the scope of EL 2.0. One such amendment appears to have expanded the scope of this levy manifold. As mentioned above, one of the prerequisites to trigger a charge under EL 2.0 is ‘online sale of goods’ or ‘online provision of service’. There have been doubts about what constitutes an online sale of goods online provision of services. In Finance Act 2021, these terms have been clarified
With this clarification, EL 2.0 has the potential to impact a wide range of businesses and business models, even if such businesses are not operating in a typical e-commerce model. Any foreign company providing services/goods in India through a digital platform could be within the scope of the levy. Consider a situation where an Indian buyer places an order for the purchase of goods through offline/physical mode with a non-resident e-commerce operator.
The goods are also delivered by the non-resident physically to the Indian buyer. The Indian buyer merely makes an online payment for the same. Given the expanded definition of ‘online sale of goods’, a mere payment that is made through an online mode can potentially be subject to the transaction to equalisation levy. The compliance obligation to discharge the levy in India is on the non-resident company. The provisions of EL 2.0 are so widely worded, amenable to interpretation to cover the sale of physical goods as also services enjoyed offline. Illustratively, while many businesses negotiate supply and service agreements online and use electronic means for confirming contracts, the delivery of goods and/or services is largely offline. Further, pure traditional brick and mortar businesses that use a fair degree of digitisation, (website, digital payments) may also come under the net of EL 2.0.
Although many expected the CBDT to clarify issues, to date there have been no such announcements and it appears that the anomalies are here to stay. As such, one would need to take a position basis the interpretation of the statute. It is now necessary to assess the implications of EL 2.0. Foreign companies need to factor in these levies as part of their global tax planning as it is likely to increase the cost of doing business in India without the ability to claim the tax credit in the home country