Equalisation Levy and the widened Scope of Digital Taxation

Equalisation Levy was introduced in 2016 with the intention of taxing the digital transactions on certain non-residents businesses. It aimed at taxing business to business transactions. The levy was applied at a rate of 6% on certain “specified services” such as online advertisement and any provision for digital advertising space or any other facility or service for the purpose of online advertisement. The finance act 2020 amended the finance act 2016, introducing a new equalisation levy@2%. We have discussed the features of amendment in this article .

Widening the scope :

Finance Bill 2020 proposes to expand the scope of the “Equalisation Levy” to include the consideration received by e-commerce operators from e-commerce supply or services to be taxed at a rate of 2%. A new section 165A was added in addition to the existing section. This levy has an effective date of 1 April 2020.

Applicability :

The amendment is applicable at the rate of 2% on the amount of consideration towards e-commerce supply and services made or provided or facilitated by an e-commerce operator to following person:

  • A person resident in India
  • A non-resident (in respect of sale of advertisements targeted at persons resident in India or using IP address in India)
  • A person who buys goods or services using an IP address located in India

For the purpose of this section e-commerce operator and e-commerce supply and services would have following meanings:

An “E-commerce operator “has been defined as non-resident that owns, operates, or manages a digital or electronic facility or platform for online sale of goods or the online provision of services.

E-commerce Supply and Services” includes the following:

  • Online sale of goods owned by the e-commerce operator
  • Online provision of services provided by the e-commerce operator
  • Online sale of goods or provision of goods facilitated by the e-commerce operator (i.e., when the operator provides a platform for others to supply goods or provide services)
  • Any combination of the above

Non-Applicability :

There are certain situations when the equalisation levy is not applicable. These include situations when:

  • The Non-resident has a Permanent Establishment (PE) in India and the E-commerce supply or services are effectively connected to such permanent establishment.
  • The equalisation levy at 6% on “specified services” (as defined above) applies to such services
  • The gross receipts/ Turnover in respect of good sold/services provided to residents, non-residents and persons using IP addresses in India is less than INR 2 crores in a year. The threshold limit of INR 2 crores is not buyer specific but includes total turnover of the e-commerce operator from all the specified buyers during the previous year.

Unlike in the case of the equalisation levy in case of specified service ( digital marketing) where the resident payer was responsible to deduct and pay the equalization levy, this levy on the e-commerce operator is the responsibility and is to be discharged by the operator itself, on a quarterly basis. Consequently, an exemption from income tax is proposed for the e-commerce operators in respect of amounts covered by the equalisation levy.

Example :

An E-Commerce operator (Zoom) receives a consideration of 100 crores towards E-commerce supply of services to Indian Residents during a previous year 2020-21 and assuming it does not have a PE in India. Thus, by a virtue of the new inserted section 165A, Zoom would be liable to pay Equalisation Levy @2% on its total turnover of Rs 100 crores from the E-commerce supply of services to Indian Residents. I.e 2 Crores.

Conclusion : 

The Equalisation levy imposed on E-commerce transactions will have a significant impact on non-residents supplying goods or services through digital means, given the wide definition of the term ‘E-commerce supply or service’ as the compliance burden is on the non-resident e-commerce operator which could lead to potential issues on compliance with added costs.

Author: Tanvi Pahwa

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