Background:

The recent, rapid and extensive evolution in the technological sphere facilitates enterprises to emerge with business models. This has enabled them to shift their profits to low or no-tax jurisdictions. These business structures have consistently found ways to remain out of the ambit of the global tax system. The fundamental reliance on the profit allocation rules based on the arm’s length principle for tax determination and collection. The Organisation for Economic Co-operation and Development (OECD) is developing a framework to tax this emerging digital economy. Therefore in line with the OECD’s recommendations, India vides its Finance Act 2016 introduced an equalisation levy of 6%.

The inception of the Equalisation Levy was introduced for the first time in the Finance Act of 2016

In line with the OECD’s recommendations of the BEPS (Base Erosion and Profit Shifting) Action Plan, India vides its Finance Act 2016 introduced an equalisation levy of 6% on payments made to non-residents on or after 1st June 2016 by:

  • A resident carrying on business or profession or,
  • A non-resident having a permanent establishment (PE) in India

for specified services which at present include payments for online advertisement and related services. The levy is of the nature of a direct tax. It is withheld by payer when the payment to non-resident enterprise is in excess of Rs 1 Lakh in FY. Also, such an enterprise is providing the specified service independent of the permanent establishment if any in India. The central government gets the credit for the deducted equalisation levy. They receive on the 7th day of the month immediately following the calendar month.

Second amendments in Equalisation Levy as done via Finance Act 2020

Alternatively, the Finance Act 2020 amended the Finance Act 2016 to widen the scope of Equalisation Levy. It introduced a new levy of 2% on the consideration received or receivable by a non-resident e-commerce operator (hereinafter referred to as operator) from e-commerce supply of goods or service or both on its own account or for the facilitation of such supply of goods or service or both:

  • To a person resident in India; or
  • To a non-resident in certain specified circumstances which include the following :
    • For the sale of advertising, which targets a customer who is resident in India. Or a customer who accesses the advertising through an IP address located in India; and
    • For the sale of data, a person who is resident in India or from a person who uses an IP address located in India.
  • To a person who buys goods or services, or both, use an IP address located in India.

The levy is not chargeable in the circumstance when the e-commerce supply or service being provided by the operator is connected with the permanent establishment of the operator if any situated in India or when the transaction is covered by the levy provisions of Finance Act 2016 or where the turnover from e-commerce supply or service is less than Rs 2 Crores. Unlike the levy of Finance Act 2016, where onus to deduct and deposit the levy was on the service recipient. Here the operator deposits the levy to the credit of the central government on a quarterly basis.

 Clarification on Equalisation Levy in Finance Act 2021

The Indian Finance Act 2020 has imposed a 2% tax on the sale of goods and services that take place through non-resident e-commerce operators having an annual turnover of more than INR 20 million. At that time, it raises criticism from different parts of the globe that the levy was broad and unclear. Also, a U.S. trade representative office had concluded that India’s equalization levy is ambiguous and fails to provide certainty to stakeholders. Indian Govt had issued its response stating that this levy is in line with the recommendations of the OECD.

Budget 2021 has provided certain clarifications on the contours of the equalisation levy for an online provider of goods and services. Thus, these clarifications are as under:

  1. Clarified that tax on Royalty /FTS and Equalisation levy (EL) are mutually exclusive effective from 1st April 2020. EL shall not apply if consideration is taxable as Royalty/FTS.
  2. Scope of online sale of goods /Online provision of services includes instances where one or more of the following activities are carried online. These are e-commerce supply or service which are subject to an equalisation levy when any of the following activities take place online:
    • Acceptance of the offer for sale, or
    • Placing or acceptance of purchase order; or
    • Payment consideration; or
    • Supply of goods or provision of services, partly or wholly
  3. 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 Clarification:

Budget 2021 has further clarified that the taxable amount for which the equalisation levy has to be paid by an e-commerce platform will include the entire sale amount. This means that tax is applicable to the entire value of goods or services. Even though where the goods or services are provided by a person other than the aggregator.

The clarification brought in the Indian Finance Bill 2021 is a welcome move as it provides clarity and also specifies the scope of the equalisation levy. The multinational companies dealing with the businesses locally are now clear on when the equalisation levy will apply to them. Specifically, by giving an edge to the royalty and FTS transactions over the equalisation levy, the government has clarified its position and intent of introducing the equalisation levy.

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