Equalisation Levy in India: The issues and the silence continues
By Akash Kumar Prasad, for Legal Corner LLP. Akash is a fifth year student of NALSAR University of Law and will be graduating in 2021.
The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (email@example.com) to get legal advice that is specific to your business needs.
Equalisation Levy was introduced in India in 2016, with the goal of taxing the digital transactions i.e. the income accruing to foreign e-commerce companies from India. Digitalization is one of the most important developments since the Industrial Revolution, which has virtually changed the way in which businesses are carried out, across the globe. Some studies have assessed that the worldwide digital economy was worth $11.5 trillion in 2016 (Digital economy report–Value creation and capture: implications for developing countries) and for India, it was assessed to be $200 billion annually (Report of ministry of electronics and information technology-India’s Trillion Dollar Digital Opportunity, February 2019). However, it has been observed that taxation laws which are based on the conventional business models have been battling to keep pace with these changes. This has brought about many transactions completely getting away from the tax net. Hence, the need was felt to address the challenges presented by the digital economy.
A joint effort to address the requirement for tax reform is being taken by OECD/ G-20 since 2015-2016 under the “Inclusive Framework on BEPS”. Base Erosion and Profit Shifting (“BEPS”), as defined by the OECD, refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity or to erode tax bases through deductible payments such as interest or royalties.
While the OECD is working towards creating consensus on an inclusive framework to address tax challenges from digitalization of the economy, several countries have introduced unilateral measures to tax the digital economy. In 2016, India introduced an Equalization Levy on revenue earned by non-residents from online advertising and related services. In 2019, the Indian Income tax law was amended to introduce the idea of ‘significant economic presence’. However, while passing the Finance Act 2020, the Indian government deferred its implementation, citing the absence of effective measures in the tax treaties. What came as astonishment to everyone was the introduction of an Equalisation Levy on sales of goods and services in India by overseas e-commerce operators, which was originally not part of the original Union Budget proposals of 2020-21. This levy has been effective from April 1, 2020 and in its current form, has wide-ranging coverage.
The Issues Involved
This levy was added as a last-minute amendment to the Finance Act day before the entire nation went into the first phase of lockdown in March. However, due to the rush in this decision-making, the provision enabling the levy was ambiguously worded and could cover several transactions which may be unintended. Moreover, it also covers transactions between two non-resident companies in case of sale of advertisement concerning Indian citizens or sale of data collected from Indian residents or if the IP address is located in India. The process transactions tracking on the basis of IP addresses may not be a viable option. With the use of bypass tools such as VPN, proxy sites etc, accurately tracking the transactions might prove to be a difficult task for the entities.
A study conducted by The Dialogue, a Delhi based think-tank proposes to rather look at the billing address or sales location to determine the residents. Moreover, the provision additionally doesn’t clear the tax base for the levy. It is unclear whether the tax has to be paid on the gross amount of the product or the commission received by the e-commerce entities.
There are also other issues such as the impact of this levy on inter-group or inter-company transactions and its interplay with the Digital Services Tax (DST) levied in other countries, which might lead to double taxation. However, due to the lack of clarifications, these issues still remain unaddressed.
Further, (Online Information Database Access and Retrieval Services) OIDAR tax and equalisation levy will create extra burden for the companies who may pass on these tax to the end consumers. Despite the fact that the levy targets non-resident companies, transferring of such cost to the Indian companies who utilize international platforms for their operations may come as an added burden to the Indian startups.
It is important that India maintains an investment friendly climate and such unilateral actions might impact it. Taxation of the digital economy is a sensitive and complicated matter. With multiple jurisdictions involved including India, there is a need for a multilateral consensus rather than a unilateral action and definitely not a rushed through levy such as the present one. There is an urgent requirement for issuing clarifications on the present levy in order to avoid taxing unintended business and narrow its scope.If you have any questions, please email me at firstname.lastname@example.org . I will be happy to set up a free consultation.