Equalisation Levy: Prevailing Issues

The digital taxation regime and equalisation levy is under scanner - an update

Equalisation Levy: Prevailing Issues

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• The story: While the OECD is working towards developing consensus on an inclusive framework to address tax challenges from the perspective of digitalisation of the economy, many countries have introduced unilateral measures to tax the digital economy.
• India at the forefront: India was a forerunner of such unilateral approaches with the implementation of the Equalisation Levy 1.0 in 2016. In 2020, the Indian Income-tax Act expanded the scope of Equalisation Levy (commonly referred to as ‘Equalisation Levy 2.0 or EL 2.0’) as part of the Finance Act 2020.

1. EL 2.0 was made effective on April 1, 2020. The new levy now includes a 2 per cent tax on gross revenues received by a non-resident “e-commerce operator” from the provision of ‘e-commerce supply or service’ to Indian residents or non-resident companies having a permanent establishment in India.
2. The expression ‘e-commerce supply or service’, inter alia, includes the online sale of goods or the online provision of services or facilitation of the online sale of goods or provision of services.

• Growing the scope: Amendments were made in the Finance Act 2021 to clarify and expand the scope of EL 2.0. One such amendment appears to have expanded the scope of this levy manifold. A prerequisite to trigger a charge under EL 2.0 is ‘online sale of goods’ or ‘online provision of service’. There have been doubts about what constitutes an online sale of goods online provision of services. In Finance Act 2021, these terms have been clarified. Now EL 2.0 has the potential to impact a wide range of businesses and business models, even if such businesses are not operating in a typical e-commerce model. Any foreign company providing services/goods in India through a digital platform could be within the scope of the levy. Consider a situation where an Indian buyer places an order for the purchase of goods through offline/physical mode with a non-resident e-commerce operator.

1. The goods are also delivered by the non-resident physically to the Indian buyer. The Indian buyer merely makes an online payment for the same.
2. Given the expanded definition of ‘online sale of goods’, a mere payment that is made through an online mode can potentially be subject to the transaction to equalisation levy.
3. The compliance obligation to discharge the levy in India is on the non-resident company.
4. The provisions of EL 2.0 are so widely worded, amenable to interpretation to cover the sale of physical goods as also services enjoyed offline.

• Summary: It is now necessary to assess the implications of EL 2.0, given the wide scope of wording. Foreign companies need to factor in these levies as part of their global tax planning as it is likely to increase the cost of doing business in India without the ability to claim the tax credit in the home country.
• EXAM QUESTIONS: (1) Explain the concept of "equalisation levies". (2) What is India's stance on taxing digital businesses operating across the borders? Explain.

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