Taxing digital supplies – The GST and Equalization levy interplay
Technology and digitalization have completely transformed our lives and businesses in ways that we could not imagine. It has resulted in an unprecedented increase in scale, scope, and speed of trade, thereby allowing the introduction of new products and services to a large number of digitally connected consumers across the world. Over the last decade, we have seen exponential growth in international trade on account of expansive digital transformation. While we all are learning the new way of life and ever-changing eco-system, levying a tax in this environment has been challenging, especially in cases of cross-border transactions.
The tax authorities across the globe have been debating on ways and means to determine the situs of digital supplies and, in turn, the taxing rights. In fact, the situs, or the location nexus for an activity or transaction, is very relevant and has been the centerpiece of many taxation laws.
With technology and digitalization, physical or locational presence may not be needed. This has the potential of ‘tax planning.’ However, the tax authorities across the globe are also gearing up for this. One such illustration to address tax challenges is the Action Plan 1 of Framework on Base Erosion and Profit Shifting (BEPS).
While the international agreement on this is yet to be reached, Indian tax authorities being very proactive, have already introduced an interim unilateral tax on certain digital services. In 2016, an Equalization levy at 6% on non-resident service providers of online advertisements was introduced. It was then extended to e-commerce supply of goods and/ or services at 2% w.e.f. 1 April 2020. Separately, under the erstwhile Service tax law (at 15%) and now continued in the GST regime (at 18%), B2C cross-border Online Information Database Access and Retrieval services (OIDAR services) have been brought to tax in line with the electronically supplied services in the EU VAT. These levies are imposed on non-residents not having a place of business in India on the principles of fiscal neutrality.
Fiscal neutrality here would mean that just because a non-resident is not located in India, he should not go untaxed if the income of revenue is derived from India. Let’s take OIDAR services to examine this concept in a bit more in detail.
Under the GST law1, OIDAR services have been defined to mean services whose:
- delivery is mediated by information technology over the internet or an electronic network;
- the nature of which renders their supply essentially automated;
- involving minimal human intervention; and
- impossible to ensure in the absence of information technology.
It further includes a list of electronic services such as:
- advertising on the internet;
- providing cloud services;
- provision of e-books, movies, music, software and other intangibles through telecommunication networks or the internet;
- providing data or information, retrievable or otherwise, to any person in electronic form through a computer network;
- online supplies of digital content (movies, television shows, music and the like);
- digital data storage; and
- online gaming
If all the above services are targeted towards a recipient in India, then the same should be taxed. In the traditional method of taxation, if the service provider was in India, he would be liable to pay tax thereon. On the other hand, if the services were provided by an overseas entity to a Service Tax/GST registered taxpayer in India, then the same would be liable to tax on a reverse charge basis. However, if the services were provided to an unregistered service recipient, the same would go un-taxed.
To plug such loopholes, Service Tax / GST has been levied on B2C OIDAR services provided in India, akin to VAT on electronically supplied services in the EU. In all such cases, the non-resident supplier has to take registration in India and discharge GST on supplies to unregistered recipients without recourse to any input tax credit. There is no turnover/ transaction threshold for levy of GST and accordingly, a supply of OIDAR service for any value of consideration would be taxable under the provisions of law.
On the other hand, the Equalization levy seems to be introduced to negate the series of judicial decisions2 whereby payments to foreign companies towards digital advertising and marketing escaped taxation in India, in the absence of the Permanent Establishment (PE) of such foreign companies in India.
The same resulted in a situation where companies earned substantial revenues and some of them could avoid income tax in the country of source as well as in the country of residence (by setting up in tax havens). On the other hand, a company resident in India earning revenue from e-commerce business was required to pay both income tax and indirect taxes thereon.
Therefore, it was decided vide Finance Act, 20163 to impose Equalization levy on the consideration paid by a person resident in India or by a non-resident having a PE in India to non-residents towards specified services, viz., online advertisement and related activities. The aggregate amount of consideration for such specified services should exceed INR 0.1 million and the payment should be to carry out business or profession.
While the levy was introduced as a separate chapter in the Finance Act, 2016, several provisions from the Income-Tax Act, 1961, have been made applicable to operationalize the levy.
In 2020, the provisions of Equalization levy (termed EL 2.0) were extended4 to the e-commerce supply of goods and/ or services. As per the expanded provisions, a non-resident e-commerce operator would be liable to pay an Equalization levy of 2% on the consideration received towards:
- online sale of goods, whether owned / not owned by such e-commerce operator
- online provision of services provided by such e-commerce operator
- online sale of goods and/or provision of services facilitated by such e-commerce operator
- sale of advertisement which targets an Indian resident customer or which targets a customer who accesses the advertisement through an IP address located in India
- sale of data collected from an Indian resident or from a person who uses an IP address located in India
Here, an e-commerce operator5 is a non-resident who owns, operates or manages a digital or electronic facility or platform for online sale of goods or online provision of services or both.
However, a non-resident e-commerce operator with a PE in India or where the e-commerce transaction is effectively connected to such PE in India, as well as cases where the sales, turnover or gross receipts of the e-commerce operator from the e-commerce supply do not exceed INR 20 million in a year, have been kept outside the EL 2.0 purview.
It may also be pertinent to note that the amounts exigible for Equalization levy are exempt from the chargeability of income-tax6. It has also been clarified by the government that the transactions involving royalty/technical services fees would be taxable under Income-Tax Act, 1961 and not be liable to Equalization levy7.
Having understood the two levies, we may turn our attention to their interaction in the Indian context. An online transaction could be subjected to GST or Equalization levy or both, depending on the nature thereof.
An electronic supply could qualify as an OIDAR service where the recipient is not registered under GST in India. It would mean that the levy would get attracted only to B2C online transactions, i.e., services, and in such cases, the foreign supplier would be liable to discharge GST. On the other hand, the provisions of Equalization levy are widely worded, and such levy applies to a wider base, viz., B2B and B2C e-commerce supplies of goods and/or services as well as digital advertising services. In fact, the levy also covers sales of advertisement/data between two non-resident persons having nexus with India.
However, at this juncture, it may be imperative to note that the transaction of sale of goods by a non-resident e-commerce operator to a customer in India could invite both Equalization levy as well as customs duty (at applicable rates) at the time of import into India. Therefore, a question does arise regarding the inclusion of Equalization levy for the purpose of valuation under the Customs law.
Furthermore, for a supply to qualify as an OIDAR service, it would be prudent to evaluate the degree of human intervention involved therein. If the same is ‘minimal,’ GST would be leviable. It may be pertinent to note that the term “minimal human intervention” is quite subjective, and since the same has not been defined in the GST law, it could potentially lead to protracted disputes.
As opposed to the above, the Equalization levy does not have any condition of minimal human intervention and would be applicable if one or more of the following online activities are involved in the e-commerce transaction:
- Acceptance of offer for sale;
- Placing the purchase order;
- Acceptance of the Purchase order;
- Payment of consideration; or
- Supply of goods or provision of services, partly or wholly.
Moreover, there is no turnover threshold to attract the GST levy on OIDAR services, whereas the Equalization levy comes into the picture where the consideration for digital advertising services is INR 0.1 million and above; and sales, turnover, or gross receipts from e-commerce supplies is above INR 20 million.
Given the intricate nature of GST on OIDAR services and Equalization levy, as well as the exchange of information/ data between the Central Board of Direct Taxes (CBDT) and Central Board of Indirect Taxes & Customs (CBIC), it has become expedient for non-resident businesses to align their positions considering the key factors from a GST perspective vis-à-vis Equalization levy.
With India joining the new two-pillar plan to reform international taxation rules (ensuring the multinationals pay taxes wherever they operate and at a minimum 15% rate), the government may be required to roll back the Equalization levy on e-commerce transactions by December 20238. While the policymakers work out the modalities for removing the existing levy, the question would remain as to the fate of GST on OIDAR services for the deal requires countries to remove all digital services tax and other similar unilateral measures and commit not to introduce such measures in the future.
1. Section 2(17) of IGST Act, 2017
2. Income Tax Officer vs. Right Florists Pvt Ltd [(2013) 086 DTR]
3. Section 165 of the Finance Act, 2016
4. Section 165A of the Finance Act, 2016 (as amended vide Finance Act, 2021)
5. Section 164(ca) of the Finance Act, 2016
6. Section 10(50) of the IT Act, 1961
7. Section 163 of the Finance Act, 2016 (as amended vide Finance Act, 2021)
8. https://www.moneycontrol.com/news/business/india-will-have-to-roll-backequalisation- levy-by-dec-31-2023-under-oecd-multilateral-convention-7561611.html