From Google Tax to E-commerce Tax
9 May 2020
India has been at the forefront of bringing in legislative changes to address the tax challenges of digital economy. In 2016, the Indian Government took its first steps to impose tax in the form of equalisation levy on specified services provided by a non-resident not having permanent establishment (PE) in India. The levy introduced via Finance Act 2016 is applicable on online advertising, provision for digital advertising space, any other facility or service for the purpose of online advertisement. Targeted at big names of digital advertisement world like Google, Facebook; the contribution of this levy to Indian exchequer reveal promising yields – Rs.339 cr FY'17, Rs.589 cr FY'18 and Rs.939 cr FY'19. To widen the reach of equalisation levy, it was widely anticipated that Government will notify additional type of transactions (including services) on which levy would apply based on the recommendations in Report of the Committee on taxation of E-commerce.
CHANGES MADE BY FINANCE ACT 2020 AND COMPARISON OF PROVISIONS
With the passage of Finance Bill 2020 in Lok Sabha, the Government moved in important and critical changes to the equalisation levy framework. Instead of widening the scope of specified services mentioned in Finance Act 2016 (Chapter VIII) provisions, the definition of equalisation levy (Section 164 of Finance Act 2016) has been amended by Finance Act 2020 to further include tax leviable on consideration received or receivable for e-commerce supply or services.
Let us look at the comparative analysis of both the provisions of Finance Act 2016:
Section 165 (introduced in 2016)
Section 165A (inserted by Finance Act 2020) – effective from 1 April 2020
Consideration for any specified service received or receivable by non-resident from
- person resident in India and carrying on business or profession or
- non-resident having a PE in India
Consideration received or receivable by e-commerce operator from e-commerce supply or services made or provided or facilitated by it
- to person resident in India or
- to non-resident for sale of advertisement which targets Indian resident customer or a customer who accesses advertisement through IP address located in India and sale of data collected from Indian resident person or from person who uses IP address located in India
- to person who buys such goods or services or both using IP address located in India
Recipient of consideration
E-commerce operator – a non-resident who owns, operates, manages digital or electronic facility or platform for online sale of goods or online provision of services or both
Nature of transaction
Online advertisement, 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
E-commerce supply or services
- online sale of goods owned or
- online provision of services provided or
- online sale of goods or provision of service or both facilitated or
- any combination of above
- Non-resident providing specified service has PE in India and specified service is effectively connected with such PE
- Aggregate of consideration of non-resident during a previous year from specified payer is less than INR 1 Lakh
- Payment is not for the purposes of carrying out business or profession
-E-commerce operator has PE in India and e-commerce supply or services is effectively connected with such PE
- Equalisation levy leviable under section 165
- Sale, turnover or gross receipts of e-commerce operator is less than INR 2 crores during previous year
Discharge of tax liability by
Payer (person resident in India and carrying on business or profession or non-resident having PE in India)
Due date of tax payment
7th day of month immediately following the calendar month of deduction of levy
Quarter ending 30 June – 7 July
Quarter ending 30 Sept – 7 October
Quarter ending 31 Dec – 7 Jan
Quarter ending 31 Mar – 31 Mar
Logically, where transaction for specified services is chargeable at 6% equalisation levy, the same transaction will not suffer taxation at the rate of 2% under the newly inserted provisions relating to e-commerce. Further, exemption provided under section 10(50) of the Income-tax Act, 1961 to income arising from specified service chargeable to equalisation levy under Finance 2016 has been extended to income arising from e-commerce supply or services.
Given the expanded scope of provisions, even the regular sale transactions undertaken through e-commerce portals relating to online books, online games, online music, software downloads, online hotel reservations, online streaming etc. will be captured within the tax net. While the provisions introduced in 2016 covered only B2B transactions, the applicability of equalization levy on e-commerce transactions extends to B2C transactions as well.
1. The e-commerce operator has been burdened with levy on entire consideration receivable by it concerning sale, turnover or receipts from goods and services provided through electronic platform rather than only the facilitation fee earned by them.
2. The provisions inserted by Finance Act 2020 seek to nullify the controversies pertaining to characterization of income in case of online transactions – whether royalty or fees for technical services or business income. Being mandatory in nature, 2% levy will be payable by non-resident e-commerce operator. There is no choice available between application of provisions of Income-tax Act or equalisation levy on nature of transactions specifically covered by the latter.
3. It is not clear as to when and based on which parameters it can be conclusively said that sale of advertisement targets a customer resident in India.
4. In reference to situation of sale of data, guidance is not provided as to what is the meaning and scope of word 'data'. Will such data be collected based on user preferences or browsers accessed by user through algorithms employed by digital platforms?
5. Unlike equalization levy on online advertisement (section 165) deducted and paid by the payer, new provisions relating to such levy cast a responsibility on the non-resident e-commerce operator to deposit equalization levy to the Government, adding to their compliance burden.
6. Since equalization levy is not an 'income-tax', the non-residents will not be eligible to claim foreign tax credit of equalization levy paid in India.
7. Section 168 refers to processing of statement filed wherein arithmetical calculations and adjustments, if any will be done. Similar to scrutiny proceedings under the Income-tax Act, the equalization levy provisions do not specify any mechanism. It is not clear as to whether e-commerce operator can challenge the obligation put on him to pay equalization levy under these provisions. Further, there is no appeal remedy provided against the intimation (after processing of statement furnished) sent by the tax department.
The global consensus on taxation of digital economy is still a work in progress. The Indian Government has gone ahead and targeted booming e-commerce business models in its unilateral approach to address taxation issues. This was done without discussion of the proposal in Parliament or stakeholder consultation, drawing ire of affected e-commerce giants. The provisions in its current state leads to double taxation and with no foreign tax credit, it eventually is a cost to the non-resident. As a consequential effect, the cost of online transactions may go up with payers having to shell out more. It is also likely that India may face retaliation from other countries (primarily US) by similar unilateral attempts at taxation.
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