Equalisation Levy – Simplified
13 May 2020
Over the last decade, IT industry has grown exponentially in India as well as on global level. The scope, supply and procurement of digital services have also increased dramatically. Various business models have come up based on digital and telecommunication networks. With these models, comes new tax challenges of nexus, characterisation and valuation of data and user contribution.
Because of inadequacy of physical presence based nexus rules in existing tax treaties and possibility of taxing such payments as royalty or fee for technical services generates a ground for tax disputes.
To bring clarity and based on the recommendations of the Base Erosion and Profit Shifting (BEPS) Action Plan 1, Equalisation Levy was introduced in India by the Finance Act, 2016. The purpose of introducing this was to tax the digital transactions; mainly the income accruing to foreign e-commerce companies from India. It is aimed at taxing business to business transactions.
Equalisation Levy was introduced in India by the Finance Act, 2016. However, it has not been made as part of the provisions of the Income-tax Act, 1961. This has been introduced in pursuance to the recommendations of the eight member Committee appointed by the CBDT on Taxation of e-commerce, which evaluated the BEPS Action Plan 1. BEPS Action Plan 1, although suggested 'equalisation levy' as one of the measures to tackle taxation of digital commerce, cautioned that selection of any of the suggested measures, including equalisation levy, should not violate any treaty obligations.
Chapter VIII of the Finance Act, 2016 introduced the concept of equalisation levy and section 164(d) of the Act provides that "equalisation levy" means the tax leviable on consideration received or receivable for any specified services under the provisions of this chapter.
Section 165 of the Finance Act, 2016 provides for charging six per cent levy on certain 'specified services', like online advertisements, any provision for digital advertising space or any other facility or service for the purpose of online advertisement.
Charge of Equalisation Levy
Section 165(1) of the Finance Act, 2016, provides for levy at the rate of 6 per cent on the consideration for 'specified services' received or receivable from a person resident in India or a non-resident having a permanent establishment in India, and carrying on business or profession. Exception to the levy is provided in section 165(2) of the Act. 'Specified service' is defined in section 164(i) to mean online advertisements, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government.
Vide the Finance Act, 2020, section 165A has been introduced in the Finance Act, 2016. This section has widened the scope of equalisation levy; to include e-commerce supply or services by an e-commerce operator and to be taxed at the rate of two per cent.
It provides that equalisation levy of 2 per cent shall be chargeable on consideration received or receivable by an 'e-commerce operator' from 'e-commerce supply or services' made or provided or facilitated by it to a person resident in India; or to a non-resident in specified circumstances; or to a person who buys such goods or services or both using internet protocol address located in India.
New clauses are inserted in section 164 of the Finance Act, 2016 which provides for the meaning of 'e-commerce operator' and 'e-commerce supply or services'.
Clause (ca) provides that 'e-commerce operator' means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both. Further, the definition of 'e-commerce supply or services' is provided under clause (cb) as 'e-commerce supply or services' means –
(i) online sale of goods owned by the e-commerce operator; or
(ii) online provision of services provided by the e-commerce operator; or
(iii) online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
(iv) any combination of activities listed in clause (i), (ii) or clause (iii).
The definition of the terms 'e-commerce operator' and 'e-commerce supply or services' is quite wide in its scope and may cover various digital transactions and services.
Exclusions and Exemptions
The Finance Act, 2016 provides for certain exclusions and exemption as well. It states that equalisation levy shall not be charged to the following:
(i) where the non-resident providing the specified service has a permanent establishment in India and the specified service is effectively connected with such permanent establishment;
(ii) where the aggregate amount of consideration for specified service received or receivable in a previous year by the non-resident from a person resident in India and carrying on business or profession, or from a non-resident having a permanent establishment in India, does not exceed one lakh rupees; or
(iii) where the payment for the specified service by the person resident in India, or the permanent establishment in India is not for the purposes of carrying out business or profession.
Collection and Recovery of Equalisation Levy on E-commerce Supply or Services
The Finance Act, 2020 has also introduced section 166A under the Finance Act, 2016, wherein specific due dates are mentioned for each quarter:
End Date of Quarter
Relevant Due Date
Interest on Delayed Payment and Penalty for Failure to Deduct
A simple interest at the rate of one per cent of such levy for every month or part of a month by which such crediting of the tax or any part thereof is delayed is charged in case of delayed payment. Failure to pay equalisation levy attracts equal amount of penalty.
Income from Advertisement and Data
The Finance Act, 2020 has further expanded the scope of business connection by inserting explanation 3A in sub-section (1) of section 9 of the Income-tax Act, 1961. Now the following incomes will also be included within the expression 'income attributable to the operations carried out in India':
(i) income from advertisement which target Indian customers or a customer who accesses such advertisement from internet address located in India;
(ii) income from sale of data collected from a person who resides in India or from a person who collects data by using internet address located in India; and
(iii) income from sale of goods or services using data collected from a person who resides in India or from a person who collects data by using internet address located in India.
Practical Aspects and challenges
The equalisation levy directly so imposed on a non-resident will have numerous practical challenges. However, as per explanation 2A to section 9(1)(i) of the Income-tax Act, 1961, 'significant economic presence' has been deferred; but India has once again unilaterally sought to levy taxation on digital transactions by forcing such a levy and consequent statutory obligations on the non-resident directly.
It is important to note that the Finance Act, 2020 has also amended section 10(50) of the Income-tax Act, 1961, which states that any income arising from any specified service provided on or after the date on which the provisions of Chapter VIII of the Finance Act, 2016, i.e. the equalisation levy, comes into force or arising from any 'e-commerce supply or services' made or provided or facilitated on or after the 1st April, 2021. However, the obligation to pay levy came into force on 1st April, 2020. This is an indicative of anomaly in the position.
Because of this gap of one year, income of the non-resident e-commerce operator may be subject to double taxation. The operator will be liable to pay an equalisation levy of two per cent as per the provisions of the Finance Act, 2020 and also as per the rates prescribed under domestic law or DTAA. This gap also creates doubt for the service recipient as far as holding obligation under the Act is concerned. The basic objective behind the insertion of sub-section (50) under section 10 of the Income-tax, 1961 has become futile. The provisions of equalisation levy as well as the expanded levy are not part of the income-tax law, therefore tax treaty benefits may not be available in relation to such levy.
Income of a non-resident arising from any specified services chargeable to equalisation levy will be exempt from tax under the Income-tax Act, 1961. Therefore, if the income of a non-resident, if any, arising from 'significant economic presence' on the basis of explanation 2A to section 9(1)(i) of the Income-tax Act, 1961 has been subjected to equalisation levy, it will be exempt under the Act. There is no option provided to a non-resident assessee to elect to be taxable either under the Act based on 'significant economic presence' or based on 'equalisation levy'.
Explanation 3A is in addition to income that is attributable by way of 'significance economic presence' in India under explanation 2A. Explanation 3A will have wide ramifications as there are no threshold limits prescribed for it to be applicable. However, one will have to wonder as to how one will track the IP addresses and its usage, when there are millions of internet users.
Equalisation levy will be a primary levy. If there is no charge under equalisation levy, the non-resident can claim that its income is not taxable in India under the DTAA as it does not have a permanent establishment in India. However, the benefit of DTAA is not available for equalisation levy, as section 178 of the Finance Act, 2016 does not refer to provisions of section 90 of the Income-tax Act, 1961. This also raises doubts on the nature of tax under the equalisation levy as to whether this would be a tax on income or an indirect tax.
Also, non-deduction of tax under section 165 of the Finance Act, 2016, will amount to disallowance of the entire consideration under section 40(a)(ib) of the Income-tax Act, 1961, and the tax so paid, will also not be covered under section 90 of the Income-tax Act, 1961.
The industry has responded to this levy as pushing companies to digital taxes in difficult times. During the outbreak of Coronavirus (COVID-19), the levy would be an additional burden on the corporates to deal with. The equalisation levy is essentially a tariff and is not based on ability to pay. Companies with higher profit margins on their digital business with India will face a lower marginal tax rate in comparison with lower profitability. The two per cent revenue tax equates to a twenty per cent income tax if a business has a ten per cent profit margin in India. This compares to the statutory tax rate of twenty-two per cent.
The question remains, are these policies the right way to tax digital businesses? Tax policy needs to be designed in a way that is neutral and imposing digital taxes might impact the business models of the companies that are providing significant value worldwide during the current outbreak.
The temptation to apply special taxes to digital firms right now when they may be more profitable than the rest of the global economy will be strong. No doubt, that countries will certainly face revenue difficulties in the coming months, both due to significant fiscal expansion because of COVID-19 crisis but also because of the economic slowdown. In such a scenario, it is important that policies that are designed to support growth and investment.
About the Author
CA MANEET PAL SINGH
CA Maneet Pal Singh has extensive experience in advising clients across a range of industries. An area of focus for him has been to work with businesses to provide them with tax and business advisory and reporting services. He has his credit experience in the field of Direct and International Taxation. He has served many reputed organisations in trade like KPMG and Deloitte. With this advantage in hand, he has gained versatile exposure of large companies.
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