- By Mukesh Butani
The amended Finance Bill 2020, which witnessed its passage last week in Lok Sabha and now awaits the President’s assent, slipped a vital amendment to expand imposition of equalisation levy, which was not originally proposed in the February 1 announcement. This provision, effective from April 1, has a far-reaching impact on compliances by non-resident e-commerce platform operators selling goods and services into and from India.
Given the uniqueness of digital e-commerce model, particularly operated by non-resident companies (in source nations), it has been unamenable to traditional rules of the ‘permanent establishment’ (PE) under international tax treaties. This has consequently left a gaping hole in the exchequer with governments labelling the phenomenon as "erosion of tax base", which emerged as the foremost theme of the OECD/G20 led Base Erosion & Profit Shifting (BEPS) Action plans.
The economic importance of digital giants and their ability to influence rule-makers worldwide for stability in the regime has brought the international tax fraternity at the centre of debate and anxiety for players. Though the BEPS Action 1 was expected to deliver a workable solution on "how, where and when" such services should be tax, an international solution is not in sight until early 2021. Consequently, countries are unilaterally introducing interim measures to tax such services, though without regard to any scientific basis of determination.
Digital models can provide services online from any remote location, leading to complexities in evolving parameters and methodology to tax their revenue. Under the traditional model, an MNC is liable to pay tax in the jurisdiction of its’ PE or the jurisdiction where the source of income exists. However, digital service sectors derive the income from users located in different jurisdictions, and in most cases, these lack a physical presence in countries where customers are located.
In pursuance thereto, India, as a part of Budget 2016, imposed a new tax ‘equalisation levy’ @6% on B2B online advertisements. The responsibility to implement such levy was left to the Indian service receive, instead of being taxed in hands, such non-resident service providers. India came under loud criticism for being amongst the first nations legislating such unilateral levy, though such tax gained prominence with other jurisdictions, in a way vindicating Indian position. To illustrate, France in 2019 adopted a similar levy, i.e., digital service tax (DST) @3% on digital intermediary and online advertising service. Similarly, Spain early this year has imposed DST on gross revenues for online advertising & intermediation activities, including online data transfer.
The amendment to Indian law has made a substantive move, though undermining its positioning (in the Bill before its passage) as being incremental. Firstly, it has expanded the scope of levy to all e-commerce supplies. Secondly, the compliance, albeit logically, is shifted to the non-resident service provider. As per the provisions, such e-commerce operator, including a facilitator, shall be liable to pay equalisation levy @2% on consideration received towards supplies of goods and services. Significantly, the expanded scope stretches beyond goods and services supplied to Indian residents and includes supplies to any person using an Indian Internet Protocol (IP) address. In other words, a foreign citizen availing services, whilst visiting India and using the Indian IP address is also covered. Further, the levy also includes non-Residents transacting with non-resident e-commerce players in specified situations, such as the sale of advertisements targeting an Indian customer, and data collected from Indian consumers. In both situations, the key is the usage of Indian IP address.
Seemingly, whilst shaping proposal for an expanded scope, the government has taken a leaf out of the Goods and Services Tax (GST) which taxes certain forms of digital services under OIDAR (Online Information Database Access and Retrieval services) category and which includes a host of services provided through the medium of internet and received online without human interface with the supplier of such services. Online advertising, cloud services, access to digital content and online gaming are other examples covered within the GST law. Though the expanded scope extends far beyond the GST law, its enforcement could be challenging.
It appears that compliance by non-resident e-commerce operators would typically work on a self-declaration basis. However, the Central bank RBI’s regulation on "payment system operation" which presently is applicable and the proposed Data Protection Authority under the Data Protection Bill could be tapped by the Revenue as sources to ensure enforceability of the new levy.
Leaving the challenge on the administration of the law, I see a set of problems for the operators expected to comply with it. First, the move for a last-minute insertion in the Bill has surprised many, besides leaving no room for planning its compliance, given that the law is effective from April 1, and the present situation of shutdown compounds the problem. I wonder if the industry players were taken into confidence before this policy move? This is more so given that no expansion was undertaken since it set out the scope in 2016.
There are several vexatious issues on scope of coverage, particularly on specified forms of advertising and sale of data, which need calibration, and can be done only by stakeholder discussions, given that e-commerce business models vary from player to player. International consensus on new rules will change how profits are allocated & taxed in a way which better reflects how the digital player create value online. EU Commission undertook an impact assessment before recommending Corporate tax reforms to deal with significant digital presence as a basis.
Ultimately, the new system is expected to secure a real link between where profits are made and where/how they are taxed. Interim measures are meant to deal with situations until comprehensive reforms have been implemented.
Though unrelated, but of equal importance to all e-commerce players, a new TDS scheme has also been introduced, implementation of which now stands deferred to October 1, under which any supply (of goods and services) facilitated by an e-commerce operator through its platform shall be subject to tax deduction @1% of the gross value of consideration. With this move, the government has brought within tax-net all e-commerce operators for supplies made or facilitated by them, though, the eventual intent would be to track the individual recipient(s) of such services, whose spend profiles may not match with income tax returns.
With the recent move, India has rushed to incrementally cast its net wide insofar as existing & potential digital service user-base is concerned. This assumes significance particularly given that it deferred by a year its plan to implement significant economic presence (SEP) test. The SEP provisions are essentially deeming fictions to bring to tax income earned by an overseas platform that advertises, streams or sell goods to an Indian IP address. Though, the reason for deferral was to reach consensus (under the framework of OECD BEPS initiative), implementation of expanded equalisation levy as a unilateral measure does not seem well-timed, given that we may be a year away from consensus. Either way, given that the Bill has seen the passage, its deferment to October 1 to align with the TDS provisions is undoubtedly a compelling proposition worth examining.
(The author is partner, BMR Legal. Views are personal. With inputs from Shankey Agrawal, Principal Associate, BMR Legal)