Equalisation levy is an unilateral measure to tax some digital activities. It was introduced in Finance Act 2016 with the intention of taxing the digital transactions i.e. the income accruing to foreign e-commerce companies from India. To tackle taxation issues in transaction conducted in cyber space, equalisation levy has been introduced. The equalisation levy has recently been widened to extend the levy on non-resident e-commerce operators as per the Finance Act 2020 which received the Presidential assent on March 27, 2020 and levy has been effective from April 1, 2020. The provisions of equalisation levy are not part of the income tax law. This levy is under a separate provision of law.

Applicability of Equalisation Levy:

The Finance Act 2016 introduced the equalisation levy with effect from 01 June 2016. This levy is charged at the rate of 6% in respect of the consideration received or receivable by a non-resident from providing online advertising services to a resident person carrying on any business or profession in India or to a non-resident person having a permanent establishment in India.

With effect from April 1, 2020 there are two transactions in respect of which equalisation levy is to be charged, namely:

(a) Sum received or receivable by a non-resident for online advertisement services rendered to the specified persons;

(b) Sum received or receivable by an e-commerce operator from e-commerce supply of goods or services to specified persons.

The Finance Act 2020 has expanded the scope of equalisation levy to cover non-resident e- commerce operators within its ambit. With effect from April 1, 2020, an equalisation levy shall be charged at the rate of 2% of the amount of consideration received or receivable by an e- commerce operator from e-commerce supply or services made or provided or facilitated by it to the following persons:

(a) A person who is resident in India;

(b) A person who buys such goods or services or both using internet protocol address located in India; or

(c) A non-resident person in the following circumstances:

♦ Sale of advertisement which targets a customer who is resident in India or a customer

who accesses the advertisement through internet protocol address located in India; and

♦ Sale of data, collected from a person who is resident in India or from a person who uses

internet protocol address located in India.

Section 164(ca) defines ‘e-commerce operator‘ as a non-resident who owns, operates or manages digital or electronic facility or platform for the online sale of goods or online provision of services or both.

As per Section 164(cb), ‘e-commerce supply or services’ means:

(a) Online sale of goods owned by the e-commerce operator; or

(b) Online provision of services provided by the e-commerce operator; or

(c) Online sale of goods or provision of services or both facilitated by the e-commerce operator; or

(d) Any combination of the above.

E-commerce supply includes every combination of the sale of goods or services that happens through the online, digital or electronic facility (‘e-commerce platform’). It does not matter whether the e-commerce operator supplies the goods or services on his own or it just facilitates it. However, the onus to pay the equalisation levy shall depend on the fact who owns the facility or platform through which the transaction of sale or supply is made. It shall be payable by a person who is deemed as an e-commerce operator and not by the person who is just selling goods or services through the ecommerce platform.                                                                                  

When Equalisation levy is not applicable for ecommerce operators:

A non-resident e-commerce operator will be excluded from the amended provision, if:

• E-commerce operator has a permanent establishment (PE) in India and such e-commerce supply or services is connected with such PE.
• Where equalization levy is already leviable as per the rules in existence before amendment in the Finance Act 2020 i.e. equalisation levy of 6%.
• Sale, turnover or gross receipt of e-commerce operator from e-commerce supply or services made or provided or facilitated is less than INR 20 mn during the previous year.

Liability to pay Equalisation levy:

Section 166 contains provisions for collection and recovery of equalisation levy on online advertisement services. A new Section 166A has been introduced for collection and recovery of equalisation levy on online supply of goods and services.

Section 166 casts the obligations on the payer to deduct equalisation levy from the sum paid or payable to the non-resident in respect of online advertisement if the amount payable exceeds INR 100,000 for a financial year in respect of each non resident vendor.  However, section 166A has been introduced which shifts this obligation to the e-commerce operator for deposit of the equalisation levy.  Thus, any person responsible for paying any sum to a non-resident e-commerce operator will not be liable to withhold the amount towards equalisation levy and deposit it with the Central government. This obligation is with e-commerce operator only.

Compliances:

The Equalisation levy on online advertisement services is payable on a monthly basis by seventh day of next month after the month in which invoice is booked.  The equalisation levy in respect of online supply of goods and services shall be paid to the credit of central government on a quarterly basis. The due dates for payment of equalisation levy in respect of online supply of goods and services are as follows:

There is a requirement to furnish annual statement.  The Equalisation Levy Statement (Form-1) has to be submitted on or before 30 June after the financial year end.

Interest and Penalties:

Every assessee or e-commerce operator, who is liable and fails to pay Equalization Levy, he shall pay simple interest at the rate of 1% of such levy for every month or part of a month by which such payment or any part thereof was delayed.

It further prescribes for levy of a penalty for non-deduction or non-payment of any or whole of the equalization levy of an amount which is equivalent to the amount that it has failed to deduct/pay.

If an assessee deducts the equalisation levy but fails to pay it within the prescribed time, a penalty is payable of INR 1,000 per day during which the failure continues.  However, the penalty shall not exceed the amount of equalisation levy that it has failed to pay.

Further, if the assessee or e-commerce operator fails to file the statement as per the provisions of the Act, it shall be liable to pay a penalty of INR 100 for each day during which the failure continues.

As per section 40(a)(ib) of Income Tax Act 1961, any consideration paid or payable to the non-resident, for the specified service, which is subject to equalisation levy, and if such equalisation levy has not been deducted or deducted but not paid on or before the due date of furnishing of return (specified u/s 139), shall not be allowed as deduction while computing income under the head business.  Further, such sum shall be allowed in the year in which such sum is paid.

Issues:

• The Income Tax Act exempts the consideration which is subject to equalisation levy and thus there should not be withholding tax on the same. Credit to the non residents is available for withholding taxes in India and not available for equalisation levy.  The rates for equalisation levy at 2%/6% are lower as compared to the withholding tax rates.  Hence, it would need a detailed study whether certain services should be subjected to equalisation levy or withholding taxes.
• It is not clear whether the gross value of goods or services which are sold through an ecommerce platform should be considered as subject to levy or only the commission/net margin charged by the operator who facilitates the trading.
• The transactions between two non residents are also considered in the widening of the scope and there are practical difficulties in implementing this. For eg: A sale made to a person outside India who buys goods and services from non resident e-commerce operator using an Indian IP address is also covered.
• Assimilation of information relating to IP addresses, preparing the IT systems to support the information required, getting a PAN, establishing the mode of payment etc could pose challenges. The extent and the manner in which the e-commerce operators are expected to maintain such information needs to be seen and reviewed from a practical standpoint.
• Detailed FAQ’s have not yet been released by the department. Many companies are not yet making the levy payment as there is still confusion and more clarity is needed on the applicability.  The department has not extended the deadline and is not considering extension.
• Application of a PAN by foreign companies is a time-consuming process as it requires certain documents to be apostilled & attested and especially at this time when departments are not functioning fully, it is a further challenge.
• In case of the 6% levy, the non resident companies may not agree for the levy because of double taxation thus shifting the burden of levy to the Indian resident who wants to use their services.
• Currently the section 10(50) specifies that the exemption will be applicable to income arising from e-commerce supply or services made or provided or facilitated on or after 1 April 2021. This has brought uncertainty for income arising between the period 1 April 2020 to 31 March 2021.
• The provisions are also not clear on the time/ point of charge of the levy for the e-commerce operator. When should e-commerce operator account for the levy?
• Applicability of Section 194-O for levy of TDS @1% on e-commerce transactions:

 The Finance Act 2020 has inserted a new Section 194-O in the Income-tax Act to provide that every e-commerce operator facilitating the sale of goods or provision of services of an e- commerce participant through its digital or electronic facility or platform, shall be required to deduct tax at source at the rate of 1% of the gross amount of sale or service or both facilitated by the e-commerce operator. Gross amount of sale or services means the price before charging the commission of the e-commerce operator.

The residential status of the e-commerce operator is not relevant under this provision. Thus, every e-commerce operator, whether resident or non-resident, will be liable to withhold tax from the sum paid or payable to a resident e-commerce participant. Further, the definition of e-commerce is not restricted to the sale of goods or services within India. This extends the scope of this provision to all e-commerce operators through whose platform Indian participants are selling their goods or services in different countries. Thus, every e-commerce operator, notwithstanding its residential status, will be liable to deduct tax from the sum payable to a person who is either resident in India or deemed as a resident under Section 6(1A).

As per above, if the income of the resident seller has already been subjected to the levy, then a withholding tax on the same income by the buyer may lead to double taxation and undue cash blockages. 

Conclusion:

Expansion in the scope of equalisation levy on digital/online e-commerce supply of goods and services by non-resident e-commerce operators @ 2% u/s 165A of the Income Tax Act and the levy of TDS @ 1% on e-commerce transactions u/s 194-O of the Income Tax Act, clearly amplifies the Indian Government’s firm determination and swift inclination towards the introduction of ‘Source Rule’ based Digital Tax on the big non-resident e-commerce players having no physical presence in India but generating substantial revenue in India through their digital e-commerce platforms.  However, it is to be seen whether the Levy will act as a deterrent for international business or some ease & clarity will be brought about in the current law to meet the objective as well as not deprive of latest innovations available over the internet.