The digital transformation in the economy has opened gates for various tax challenges in terms of nexus, characterization, and valuation of data and user contribution. Even though the companies manage to generate huge revenue from a country, they pay none or negligible taxes in the country. The OECD, in its action plan, has tried to provide ways to circumvent these challenges. One of the recommendations given in Action Plan 1, was to levy 'Equalization Levy' on e-commerce transactions. India was one of the front liners to implement this suggestion and levy such charge on specified transactions vide Finance Act 2016.
As per the provisions introduced in Finance Act 2016, the resident payer is liable to withhold 6% equalization levy on the consideration payable to the non-resident for specified payments (mainly online advertisement). It would be important to note that ‘equalization levy’ was charged as a separate levy and was not a part of Income Tax law. Accordingly, in order to avoid double taxation, the Indian Government has exempted such income from payment Income Tax, through specific exemption.
Amendment vide Finance Act, 2020
Considering the increasing scope of e-commerce practices in India, the Government of India vide Finance Act, 2020, has now expanded the scope of such Equalization Levy. Earlier, the equalization levy was only charged on a transaction involving advertising on digital platforms.
However, with effect from 1 April 2020, 2% equalization levy shall be paid by the e-commerce operator on considerations received or receivable by an e-commerce operator from e-commerce supply or services made, provided, or facilitated by it to:
- An Indian resident
- A non-resident in ‘specified circumstances,’ namely:
- Sale of advertising that targets Indian customers. The ‘Indian Customer’ is a person who is resident in India, or access the advertisement through an IP address located in India; and
- Sale of data collected from Indian customers; or
- A person who buys such goods, services, or both via an IP address located in India.
‘E-commerce operator’ in this case is defined as a nonresident who owns, operates, or manages a digital or electronic facility or platform for online sales of goods, online provision of services, or both.
Further, it has been clarified that 'E-commerce supply or service' shall cover –
- Online Sale of goods owned by the e-commerce operator;
- Online provision of services by the e-commerce operator;
- Sales of good, provisions of services, or both, facilitated by the e-commerce operator; or
- Any combination of the above.
Irrespective of e-commerce operators being an inventorybased model or a marketplace based model, all types of e-commerce operator shall be liable to pay equalization levy.
However, no equalization levy shall be levied if:
- The gross turnover of the e-commerce operator from the e-commerce supply or services made, provided, or facilitated in India is less than INR 20 million during the financial year;
- If the e-commerce operator constitutes a PE in India and such e-commerce supply or service is effectively connected to such PE.
It would be important to note that unlike earlier provisions, the equalization levy for e-commerce operator is payable by the non-resident e-commerce operator on a quarterly basis and it is not in the form of withholding by resident payer -
|Quarter Ended||Due Date|
|30 June||7 July|
|30 September||7 October|
|31 December||7 January|
|31 March||31 March|
Simple interest at the rate of 1% per month or part month will be imposed on late payments, and failure to pay the levy will incur a penalty equivalent to the amount of the levy.
Further, similar to Income Tax exemption for online advertisement, e-commerce operators are also given an Income Tax exemption once they are liable for the equalization levy.
There are many ambiguities on the application of these provisions, and this may present certain practical challenges.
- For the online advertisement service, the service recipient was required to deduct the equalization levy and deposit the same with the government. However, the amendment brought in the Finance Act 2020 poses an obligation to pay the equalization levy in e-commerce supply or service on the e-commerce operator and not on the service recipient/ customer. It would significantly increase the compliances for foreign companies in India. Besides, it remains to be seen, the manner in which the government tracks the compliance from these companies.
- Based on the current wordings of the law, there is a possibility that certain payments would fall under the equalization levy as well as covered under normal income tax provisions (like Royalty, Fees for Technical Services, etc.). Currently, there is no clarity on how these provisions would have to be applied, and there could be issues whereby the payer may insist on withholding taxes, whereas the payee may want to pay only equalization levy. Equalization levy provisions provide that any payments covered under these provisions would be exempt from Income tax. In order to facilitate the same, a separate section has been introduced under the Income Tax Law. However, based on the current law, the equalization levy has been made applicable from April 1, 2020, whereas the exemption from income tax has been made applicable from April 1, 2021. It appears that the same may be a typographical error and may be corrected, but the authorities have not issued any communication regarding the same till date.
- The 2% levy is on the gross revenue of the e-commerce operators, without considering the profitability/actual income of the e-commerce operator. It would be interesting to see how the non-resident e-commerce operators cope with such provisions, specifically, who are facing losses or have limited profits.