Taxations:Equalisation Levy 2.0 – Proposed Amendments
In order to tackle the tax challenges due to digital economy, several measures are being implemented globally. In this quest, India introduced Equalisation Levy (‘EQL’) in 2016, which was subsequently expanded in 2020. To address the issues faced by industries while applying the EQL provisions, amendments have been proposed in Union Budget 2021 to rationalise and / or clarify the EQL provisions
The global economy has undergone a drastic change in last few years in the way of conducting business. Instead of the traditional brick-andmortar approach of doing business, a good number of business activities can be carried out nowadays through digital or electronic means. This digital economy is a result of various evolving business models such as e-commerce, digital advertisements, social media, payment gateway, etc. Numerous online businesses are now carrying on their business across the world without having any physical presence in a particular jurisdiction (say, India).
In such cases, the online businesses might not be subjected to any tax in that jurisdiction (India) on their revenue, in light of the beneficial provisions under the tax treaties, and thus resulting in a loss of tax revenue to the Indian government.
In Finance Act, 2020 (‘FA20’), the scope of EQL was expanded to cover non-resident e-commerce operators w.e.f. FY 2020-21 (commonly referred to as ‘EQL 2.0’). As per expanded scope, EQL @ 2% was levied on any consideration received or receivable by a non-resident e-commerce operator from
e-commerce supply or services made or provided or facilitated by it to
- a person resident in India; or
- a non-resident (in respect of the sale of advertisements targeted at, or data collected from, a person resident in India or using an IP address located in India); or
- a person who buys goods or services using an IP address located in India
ISSUES AND AMENDMENTS
There were certain loose ends in the existing provisions for which the stakeholders were looking forward to certain clarifications. In order to rationalise and / or clarify, the following amendments have been proposed
1. Addressing the double taxation for FY 2020-21
The amendment brought through FA20 resulted in an issue / anomaly that while provisions of EQL 2.0 were applicable with effect from 01 April 2020, the corresponding exemption from income tax in the hands of non-resident recipients was applicable only from 01 April 2021. It meant that during FY 2020- 21, such income will be taxable under the Act and will also be subject to EQL 2.0 (as the exemption was available for FY 2021-22 and onwards)
Amendment to Section10(50) of the Act In order to remove the aforesaid double taxation, Union Budget 2021 has proposed to amend Section10(50) of the Act, to provide that any income of a non-resident, which has been subjected to EQL 2.0, shall not be taxable under the Act w.e.f. 01 April 2020. Thus, making the said income exempt for FY 2020-21 as well.
2.What qualify as ‘online sale of goods’ or ‘online provision of services’?
The provisions of EQL 2.0 were made applicable to e-commerce supply or services, which were defined to mean ‘online sale of goods’ or ‘online provision of services’. The expressions ‘online sale of goods’ or ‘online provision of services’ are very broad terms and have not been defined anywhere in the Act and EQL provisions In the absence of any definition of these terms, there was no clarity as regards the applicability of EQL 2.0 where only one element of sale (such as, placing of an order) has taken place through an online medium (such as, an application or email), would it be considered as subjected to EQL 2.0 by the tax authority particularly, when such electronic medium is being maintained and managed by the seller.
There could be an interpretation that if all the elements of a sale transaction (i.e. from placing an order to till the transfer of title of goods) have occurred online, then only same could be treated as an online supply of goods, which could exclude a large number of physical goods sold online from application of EQL 2.0.
Further, there could be another interpretation that if an order has been placed through an email and where the platform / server used for placing such order is being maintained and managed by the online seller itself, then that could also be classified as e-commerce operator and thus subject to EQL 2.0
On a plain reading of the aforesaid proposed amendments, it appears that the legislature is in favour of levying EQL 2.0 on every transaction including which has taken place entirely in physical world (i.e. without having any element involving electronic means) as long as one single part of such transaction has happened online (for which a platform has been managed by the e-commerce operator). Therefore, this provision may result in a radical expansion of scope of EQL 2.0, perhaps far beyond its original intent.
The objective of amendments brought through Union Budget – 2021 is to clarify the position and intent of the government of introducing the EQL 2.0. While it seeks to clarify certain doubts and settle certain ambiguities, there is still a need for further clarifications to reflect and provide more clarity on other aspects (such as, availability of treaty benefit where EQL provisions apply, applicability of EQL provisions on physical supply of goods, absence of advance ruling mechanism, etc.) to make this levy more viable and acceptable
