Equalisation Levy in E-commerce Transactions: Analysis and Challenges
[Debayan Gangopadhyay is a student at ILS Law College, Pune.]
Equalisation Levy (EL) is a form of tax that was recommended by the OECD in 2015 under its BEPS Action Plan-1 relating to the digital economy. The levy was a possible measure suggested by the OECD for fair taxation of online activities and generation of revenue by organisations in territories where they do not have a physical presence. As the direct tax method of income tax works on the basis of permanent establishments and falls short in taxing activities conducted only digitally, there was a need for a different tax structure to effectively tax such activities. The Indian government was quite prompt in following the recommendation and introduced the concept of EL for the first time through Chapter VIII of the Finance Act 2016 (2016 Act), starting only with online advertisements and related services. Pertinently, India was the first country to implement EL in its tax regime. The very next update of EL was to extend its scope towards e-commerce activities through the Finance Act, 2020 (2020 Act). This was enacted on 24 March 2020 and has been made applicable from April 2020. However, this has been done in a different structure from the 2016 EL.
Vide the 2020 Act, Chapter VIII of the 2016 Act has been amended. The terms 'e-commerce operators' and 'e-commerce supply or services' have been defined by amending Section 164. While the former is defined as a non-resident company performing e-commerce activities in India, the latter is meant to include usual e-commerce supply or services including facilitation of the same.
Section 165A has been added to serve as the charging section for EL on e-commerce activities. This provision lays down forms of e-commerce transactions which will attract EL. First, it applies to sale of goods or services to a person resident in India. Second, it applies to non-residents in certain specified events. These specified events refer to sale of advertisement related services where the targeted customers of advertisements are in India or such advertisements are accessed through IP addresses located in India. They also include sale of data acquired from India or from persons using IP addresses located in India. Third, it applies to anyone using e-commerce websites to make transactions through an Indian IP address. The exclusions include e-commerce operators having permanent establishments in India wherein the e-commerce supply is effectively connected to the establishments; activities coming within the ambit of Section 165 i.e., EL provisions in the original 2016 Act; and operators with less than INR 2 crores worth of turnover in the previous financial year.
Section 165A also sets the rate of EL at 2% on the amount of consideration received or receivable by non-resident operators in exchange of e-commerce services. This levy is to be paid to the credit of the Indian government on a quarterly basis starting quarter ending June, 2020. The major difference of the 2020 EL from 2016 provisions under Section 165 is in the collection part of it. As per Section 166A, EL will be paid by non-residents operators to the government shifting the onus from the consumer in India to deduct EL from the payment due to a non-resident and thereafter paying the deducted amount to the government.
The provisions towards relevant statements, interests, penalties, etc. (Sections 166-180) have been accordingly amended to include EL under Section 165A.
Valuation of 'consideration'
As mentioned, EL is to be paid at a 2% rate on the total consideration amount to be received by the non-resident operator. The valuation is valid for operators directly making supply to customers in India, however, as the definition of 'e-commerce operators' includes facilitators, the validity might not continue to hold. E-commerce operators running websites with the business model of facilitating trade between the supplier and the final customer do not receive the entire consideration for themselves but a commission from the supplier. The onus of compliance is ultimately on the e-commerce operator and not the supplier, however, the consideration received by facilitators has to necessarily be passed on to the supplier. This might lead to an unfair burden on the facilitator in case of defaults, as actions by the Indian government on basis of the provisions cannot be taken against the supplier. Also, the threshold of INR 20 million worth of turnover provided under Section 165A might not apply to the foreign supplier but apply to the facilitator. In such a case, the legislative intent to exclude smaller businesses from EL will get anguished just because the facilitator crosses the threshold. There needs to be clarification on the valuation of the consideration on which EL is to be levied and it needs to be different for e-commerce operators acting merely as facilitators and that of others.
Inclusion of transactions involving IP addresses located in India
This issue has multifold problematic implications. E-commerce activities through an Indian IP address attracting EL means that a consumer using a non-resident e-commerce platform to buy goods or services to be delivered outside India but does so sitting in India will attract EL. There can be instances wherein customers in India order something online for non-resident persons through e-commerce and such transactions, the whole of which will take place outside India including the supply, delivery and possibly even the payment of it, will be taxed by India because of using an Indian IP address. This seems to be against the objectives of OECD in recommending EL which is to only effectively tax significant economic presence in the digital economy of a jurisdiction. Accessing and availing e-commerce services outside India through an IP address in India does not necessarily imply a significant economic presence of the non-resident operator. But the current EL structure implies that the use of IP addresses of a country would mean having significant economic presence in that country. This is more so applicable where an Indian IP address may be used through a virtual private network (VPN) software and is a common practice amongst internet users for reasons such as security purposes and better access. The revenue should clarify its intent behind keeping IP addresses as a factor to levy EL and this factor should be considered only when there is a nexus of it to a significant economic presence.
Further, e-commerce operators will also have to develop and maintain adequate digital infrastructure to recognize the use of such IP addresses. If EL is not meant for circumstances where a VPN service is used to access through an Indian IP address, there needs to be infrastructure to bifurcate such instances. Although such infrastructural developments do seem to be the right way in addressing digital taxation concerns in the long run, not all small or medium businesses which also act as e-commerce operators may have the capacity to implement these. It is more so difficult in this time of COVID-19 crisis, and the 2020 Act making EL applicable from April 2020 means that such developments need to get done in the present.
The tax model of EL in the first phase of 2016 is different from the present one majorly in terms of collection of levy. Under Section 165 where only B2B transactions are attracted for specified services, the responsibility is on the Indian company using the service to deduct EL from final consideration being paid to a non-resident business. It works in a format similar to the reverse charge mechanism of indirect tax regime where the recipient of the service is responsible for payment of tax. However, EL concerning e-commerce operators under Section 165A has to be paid by the non-resident operator to the credit of the government in a straightforward manner similar to direct taxation. The former model probably would not be viable in the present case as the levy is extended to B2C transactions as well. Nevertheless, a concern arises as to how vigilant can the revenue department be in identifying lapses and defaults of non-resident operators in paying their fair share of EL. As the statements in regard to EL have to be furnished by the non-resident operator, one way would be to scrutinize such statements to the satisfaction of the government to identify defaults. The revenue authorities have to make a uniform standard of such scrutiny and declare it to the non-resident operates. The revenue would also need access to other aspects and activities of the foreign company to effectively check tax evasion under EL and it is confusing as to how an assessing officer in India would have the power or jurisdiction to do so. Further, penalising and prosecuting a non-resident in this regard would also form part of this concern.
The extension of EL to non-resident e-commerce operators by India was a sudden move by the Finance Ministry as this was never part of public consultations or mentioned in the Finance Bill 2020 or the union budget speech given by the Finance Minister. The 2020 Act was enacted on 27 March 2020 and the levy has been made applicable from 1 April 2020. As discussed above, there is a requirement of a huge amount of infrastructural developments for proper implementation and compliance by non-resident operators. This is a grave concern for foreign e-commerce companies who regularly conduct its activities with a customer base in India. In fact, lobbying groups across the world including the U.S. Chambers of Commerce have written to the Finance Minister for delay of the implementation of Section 165A by at least 9 months and also to allow public consultation on the levy and its structure.
India has been prompt since the beginning towards implementing recommendations of the OECD’s BEPS project and has been lauded and followed by other jurisdictions. The extension of EL in this context is surely the way to lead further and combat challenges of taxing the digital economy. Nonetheless, this should be done in an appropriate manner without leaving lacunas in the tax structure and not at the cost of clarity and practicality. There is a wide array of complications that could arise from the present unexplained structure of EL on e-commerce activities. The government must provide explanations and clarifications on possible issues that could arise and also form guidelines and directions for proper compliance of the EL structure by non-resident operators.