The Curious Case of India’s Equalisation Levy


INTRODUCTION TO EQUALISATION LEVY AND INDIA’S EL 1.0


In the last decade, IT has seen explosive growth in India and worldwide. The supply and acquisition of digital services have therefore expanded exponentially. This has led to many emerging market models on which digital and telecoms networks are heavily dependent. Other consequences are series of new fiscal problems- including the association, the characterization and assessment of data and customer contributions and new market models.

The convergence of inadequacy of the nexus laws depending on the physical location of the current tax treaties and the opportunity to levy charges such as royalties or fees for professional services provides a fertile basis for tax disputes. In this context, OECD and the G20 Group launched a project to solve the tax problems of the digital economy, which became the Base Erosion and Profit Shifting (BEPS) project, which in turn gave us the BEPS Action Plan 1.

This plan suggested three transitional solutions to address the issues of digital transactions. One of the proposed concepts was Equalisation Levy, which India adopted as EL 0.1. It was a 6% rate, which was to be levied on online ads, the provision of online advertising spaces and the services rendered by a non-resident service provider via an Indian resident (corporation or individual).

E L 2.0 AND ITS INTRODUCTION IN THE INDIAN ECONOMY

Recently, the Finance Act 2020 further extended the scale to be applied to e-commerce non-residential operators by adding a new 2 per cent levy. This is EL 2.0, which was implemented on 1 April 2020. While EL 1.0 was restricted to B2B transactions and wage earners were expected to comply, all B2B and B2C transactions are protected by EL 2.0, and the non‐resident e-commerce contractors are to comply with it.

It implies that non-resident E-commerce providers will now be billed on the credit they earn or are due from e-commerce supplies they make, offer, or promote. The coverage includes all types of such facilities meant for Indian citizens, non-residents and those using an Indian Internet Protocol (IP) address in specified conditions.

THE PROBLEM WITH EL 2.0


The EL 2.0 regulations, in their current state, are riddled with confusion about their meaning, and various inferential problems are leading to functional difficulties in enforcement. Furthermore, the statute states that if a sale is protected by the terms of EL 2.0, the transaction is not subject to withholding tax.

The problem is that one sale will be subject to both this 2% tax and withholding tax for this initial year of service of EL 2.0. This must be dealt with as a matter of urgency. From a realistic standpoint, there were concerns that enforcement within the specified time frame would become very tedious as the payment deadline for the last quarter was 31 March itself.

Moreover, as is necessary for this particular year, this quarter might also be crucial. Any extension will be at the expense of interest. There are time and costs in the development or modification of the IT infrastructure necessary to trace transactions that could be directed at Indian citizens or those using the Indian IP address of a non-resident e-commerce provider.

HOW IS THE US INVOLVED IN THIS?

The decision to establish a joint tax arrangement in the electronic and digital economies was unexpected, as India is an active member of BEPS 2.0, OCED's Pillar 1 scheme. The concept of a global consensus amongst member states is an integral aspect of this initiative. Therefore, unilateral intervention without any prior consultation or comprehensive memorandum has caused substantial confusion in the public. This move also attracted foreign interest.

Under Section 301 of the 1974 Trade Act, the US Administration announced an investigation focusing on instances of discrimination against American businesses. According to the US Administration, this levy charges US businesses with an extra tax burden. Moreover, the USTR or the office of the US Trade Representative expects that the total US corporate tax bill may surpass $30 million annually for US corporations. The inquiry focused on the 2% EL imposed on e-commerce service supply in India.

In response to the allegations made by the U.S., India responded by saying that E-commerce retailers in India are already taxed for domestic-generated revenue in India. But non-resident e-commerce providers do not, in the absence of an equalisation levy, have to pay any tax for the e-commerce supply or services to India. Thus, the levy is an affirmation of the concept of the virtual environment that the retailer will conduct commercial transactions without a physical presence.

MOVING FORWARD

The extension of EL 2.0 to all types of e-commerce operations is a praiseworthy step, but the usage of vague terms has resulted in avoidable problems. Above all, a clarification of the nature of the definitions of "e-commerce operators" and "e-commerce supply and services" is needed since these are likely to vary from the Inclusive Framework recommendations and thus would not reflect the government's true intentions. Despite the challenges, the amendments to the EL came into effect due to the late implementation of the levy and the lack of any discussion on it.


It is worth noting that alongside the justification of the levy, India is also requesting that the US reinstate its GSP priorities, which were suspended in 2019. Therefore, the complexity of the negotiations, in this case, is vastly different because of the present diplomatic closeness and simultaneous examination of many countries. India may have some advantage when a situation of negotiations does arise. However, since there is more at stake for India in the upcoming talks, it is imperative to plan for them.

REFERENCES


  1. Lahiri, A., Ray, G. and Sengupta, D., 2021. EQUALISATION LEVY. [online] Brookings.edu. Available at: <https://www.brookings.edu/wp-content/uploads/2017/01/equalisation-levy.pdf>

  2. Malhotra, V., 2020. Equalisation Levy on E-Commerce operators Equalisation Levy: A critique on India’s unilateral measure. [online] https://www.ey.com/. Available at: <https://www.ey.com/en_in/tax/india-tax-insights/equalisation-levy-a-critique-on-india-unilateral-measure>

  3. Incometaxindia.gov.in. 2020. EQUALISATION LEVY. [online] Available at: <https://incometaxindia.gov.in/News/Report-of-Committee-on-Taxation-of-e-Commerce-Feb-2016.pdf>

  4. Prakash Behera, D. and Kumar, H., 2020. Equalization Levy on Non-Resident E-commerce Players: India’s Ace in the Hole or a Stumbling Block for Foreign Players? - The International Centre for Tax and Development (ICTD). [online] The International Centre for Tax and Development (ICTD). Available at: <https://www.ictd.ac/blog/equalization-levy-non-resident-ecommerce-india-block-foreign-players/>

  5. Aulakh, G., 2020. Global MNCs and startups seek delay of equalisation levy. [online] The Economic Times. Available at: <https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/global-mncs-and-startups-seek-delay-of-equalisation-levy/articleshow/75446524.cms>

  6. Incometaxindia.gov.in. 2016. Equalisation Levy. [online] Available at: <https://incometaxindia.gov.in/pages/acts/equalisation-levy.aspx>

  7. @businessline. 2021. Delhi economy projected to contract by 5.68 per cent in FY’21. [online] Available at:<https://www.thehindubusinessline.com/economy/delhi-economy-projected-to-contract-by-568-per-cent-in-fy21/article34020083.ece>

FURTHER READING

  1. https://taxguru.in/income-tax/equalisation-levy-indias-answer-digital-economy.html

  2. https://cleartax.in/s/equalisation-levy

  3. https://www.business-standard.com/article/economy-policy/ustr-backs-action-against-india-s-equalisation-levy-finds-it-burdensome-121010700841_1.html

  4. https://poseidon01.ssrn.com/delivery.php?ID=646117100022000070123113104120101104118081007014064089086093000069118086081026100108050122101118013124055089103127070098086099023074053015000066103064017103096010018046080092069104003122016098094106068102070094072099079009116116007093011019110028125&EXT=pdf&INDEX=TRUE


Written By: Shubhi Pandey (shubhi221199@gmail.com)

Edited By: Priyanshi Kapoor