Equalization Levy: Concerns Over Taxation on Digital Economy

[By Devansh Jain and Vishal Marakana]

The authors are students at the Institute of Law, Nirma University.

In 2017, the Organization of Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) came up with an action plan to tax the companies which operate digitally in any country without having any actual physical presence in that country. The main aim was to tax the companies which transact digitally and avoid tax in the host country. Since, there was no appropriate mechanism, the concept of Equalization levy was introduced in India through the Finance Act of 2016, which targets companies operating digitally.

 Although the Finance Act, 2016 (‘the Act’) introduced Equalization Levy only to target and tax the specified payments pertaining to online digital advertisements, in 2020, an amendment was made to the Act which expanded its scope immensely The broadened concept of Equalization Levy under this amendment stated that the consideration received/receivable by the E-commerce provider from services or products rendered by digital means will be taxed at 2%.

The 2020 amendment was obscure and wide in scope, for which the parliament brought in various clarifications in the 2021 budget. However, those clarifications ramified the concerns over the amendment furthermore. In this article, we have discussed the issues with these clarifications to the amendment.

Extensive and Inexplicit Clarifications

The clarification regarding the ambit of equalization levy stated that the consideration received/receivable from E-commerce supplies or services shall include the consideration for the sale of goods or services irrespective of whether the non-resident E-Commerce Operator owns or provides them. This clarification crucially affects the non-resident E-commerce operators since now they are required to pay tax on the entire value of the goods or services, instead of the commission which they actually receive.

Let us understand this with an illustration, an E-Commerce Operator based outside India is a platform to book movie tickets, which deducts 10% commission on each transaction. Now, a person books a ticket for a movie shown at PVR cinemas and pays INR 200 for the same. In this scenario, E-Commerce Operator’s commission is INR 20 and the Equalization Levy which is to be charged on the entire transaction value is INR 4. Hence, the E-Commerce Operator is charged with 20% of the commission earned by it.

From the illustration made above it can be observed that the E-Commerce Operator is not exactly earning 10% commission from the transaction. This makes it burdensome for the E-Commerce Operator which merely acts as an intermediary between the customer and the service provider.

Rationally, the charge on the entire value of goods or services provided through the E-Commerce Operator seems preposterous. Ideally, the Equalization Levy shall be levied only on the commission received by the E-commerce operator, rather than on the entire transaction value.

The clarification is so ambiguous that the wording of provision “consideration received/receivable” creates a deeming fiction on the E-Commerce Operator to pay 2% of the Equalization Levy which might turn out to be unwarranted. In a situation where a transaction is made between two parties via a third-party application (messaging app/email), even if the third-party application is only acting as a communication channel and does not charge any commission, it would be liable to pay Equalization Levy on the transaction value.

Ambiguity Regarding Approach to the Authority for Advance Ruling

The Authority for Advance Ruling aids a non-resident in arranging his operations which are subject to payment of tax and facilitates in assessing the tax liability on future transactions. However, the Finance Act 2016, does not provide any provision regarding the Authority for Advance Ruling in the context of Equalization Levy.

The clarification which amended Section 10(50) of the Income-tax Act, provides that, when tax is paid in the form of Equalization Levy, the assessee is exempted from paying any other tax under the Income Tax Act. Now under Section 10(50), a party might approach the Authority for Advance Ruling to determine whether it can claim an exemption under Section 10(50) or is subject to the provisions of Equalization Levy. On the contrary, Authority for Advance Ruling does not have any authority to adjudicate on the matters relating to Equalization Levy.

Possibility of Double Taxation

The provisions of the Equalization Levy were brought under the Finance Act, instead of the Income Tax Act, so that the party cannot claim benefits of the accommodating provisions of either the Income Tax Act or the Double Taxation Avoidance Agreements.  However, this action of the parliament has its own consequence; the claim for deduction against the tax obligation of Equalization Levy might be denied in a resident country of non-resident E-Commerce Operator, which would result in payment of double taxation by the E-Commerce Operator.

Potential to Hinder Extra-territorial Operations

The ambit of Equalization Levy is vast enough that it covers all the transactions which take place through an Indian IP address.  Cases wherein a non-resident transact through a non-resident E-commerce Operator using an Indian IP address can also fall within the ambit of Equalization Levy.

Conclusion

The Covid-19 pandemic has caused a huge disruption on the business entities, adding onto that, the extra burden of the Equalization Levy tax compliance will lead to the shifting of onus by the operators to customers.

The Equalization Levy was introduced by OECD as a measure to collect the tax which was otherwise not collected, to formulate a system in which there are fewer deviations and fewer compliance costs, but due to lack of proper guidelines and clarifications, this has become nothing but an additional compliance cost for the E-Commerce operators.

On one side, the Government wants to reel in foreign investment for which it has proposed various incentives, such as Special Economic Zones, exemption on the duty of import, income tax, and VAT exemptions, etc, on the other side, the Government has introduced Equalization Levy to charge tax on non-resident E-commerce Operators which is arduous, flawed and terribly irregular.

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