India’s Digital Tax - Are you covered?
India had introduced Equalization Levy (EL) in 2016, which mainly covered online advertisement, any provision of digital advertising space or any other facility or service for the purpose of online advertisement. EL was payable at the rate of 6% and the onus was on the resident to collect and pay the same to the Government Treasury.
Budget 2020 extended the scope of EL to cover digital transactions. EL was extended to include e-commerce supply or service, including the online sale of goods or online provision of services or both facilitated/ owned by e-commerce operators. For this purpose, an e-commerce operator means a non-resident who owns, operates, or manages digital or e-facility or platform for the online sale of goods or online provision of services or both. The EL on these services was applicable at 2% of the consideration received on e-commerce supply of goods or services or both by the e-commerce operator for the sale or facilities provided to a resident in India or a non-resident in specified circumstances or to a person who buys goods or services or both using internet protocol address located in India. Overall, a threshold of INR 20 million has been provided for applicability.
However, since the terms online sale of goods and online provision of services were not defined, there was ambiguity around the applicability of levy. Also, there was a fear of double taxation in cases where payments were covered both under EL as well as taxable under Royalty/Fees For Technical Services (FTS) provisions.
In light of the above, Union Budget 2021 provided the following clarifications/amendments:
- EL shall not be applicable for cases where consideration for e-commerce supply or services is taxable as royalty or FTS in India. Thus, taxation as royalty/fee for technical services under the Income-tax law would have priority over EL.
- Scope of online sale of goods/ online provision of services
has been defined to include cases where one or more of
the following activities are carried out online:
- Acceptance of an offer for sale; or
- Placing or acceptance of purchase order; or
- Payment of consideration; or
- Supply of goods or provision of services, partly or wholly.
- Consideration for the purpose of levy of EL clarified to include the value of goods or services, regardless of ownership or facilitation by the e-commerce operator.
- Further, these amendments shall be applicable retrospectively from AY 2021-22.
The new EL provisions would have a huge impact on various companies doing business with India. Thus, IT, cloud-based services, subscription-based models, video conferencing, online courses, gaming industry, etc., would be highly impacted.
Also, the clarification provided in respect of the definition of online sale of goods/online provision of services results in expanding the scope of EL even to non-digital transactions. The term ‘digital or electronic facility or platform’ has not been defined. In normal parlance, it could cover any digital communication that would include emails or calls, which would cover all kinds of cross-border transactions, where goods are ordered over call/online but delivery and payment is made through regular mode. No clarification has been provided whether a digital or electronic facility or platform includes only the transactions, which are concluded through technology, without physical involvement of any person or it would also include the one-to-one communication between the parties through emails, video call, etc. In our view, the intention of the levy was not to cover the transactions, where the same are concluded or delivered over emails, video calls, etc., given the current global trade scenario, such would be similar to physical supply of goods or services. However, such anomaly continues, as the tax authorities have not defined the term ‘Online’, and this may result in prolonged litigations unless appropriate clarifications are issued. Also, since payment of consideration is covered, it creates an ambiguity whether payments made through normal banking channels or through online banking platforms would also get covered. One of the clarifications states that an e-commerce operator would be liable to pay the EL on the entire value of the transaction and not on the convenience fee received by them. This will result in significant hardship for the e-commerce operators as this levy may eat up their margins if they are not able to pass this on to their vendors. On the contrary, this clarification is a welcome step for Indian e-commerce operators since it will create a level-playing field between foreign and domestic companies.
Tax on Royalty/FTS and EL are considered mutually exclusive effective from 1 April 2020. This would mean that one will have to evaluate the taxability of the transaction as Royalty/ FTS before evaluating the EL applicability. It’s a known fact that taxability of transactions as Royalty/FTS has been a highly debatable issue for various types of transactions (like software payments, web hosting, cloud hosting, management services, online subscriptions, etc.) and judicial views are divided on these transactions. Accordingly, while adopting the view on FTS/Royalty v/s EL in India, MNE’s will have to evaluate the position thoroughly, specifically because there is no provision for refund of EL under the law. Accordingly, if a view is adopted that EL is applicable on a particular transaction and it is not Royalty/FTS, and in the future, if tax authorities rule the said transaction as Royalty/FTS, the taxpayer may not be able to claim back the EL already deposited by them. This may result in double taxation.
In addition to the above, provisions of Significant Economic Presence (SEP) would also be applicable from Financial Year 2021-22. While these provisions would become applicable from 1 April 2021, but the threshold limits have not been prescribed yet. It would be important to note that recently, the indian government has notified Information Technology (Intermediary guidelines and Digital Media Ethics Code) Rules 2021, which provides additional conditions for ‘significant social media intermediary,’ which is defined based on the number of users in India. Taking a cue from this, in our view government should be out with the thresholds soon. While SEP provisions are applicable only to non-treaty countries, it would be interesting to see the interplay between SEP and EL