There has been much uproar about equalisation levy in the context of the digital economy. The essence of this levy is to make companies pay their fair share of taxes and address challenges posed by the increased digitalization of the economy. Lately, the Finance Act, 2020 extended the ambit of the equalisation levy aiming at e-commerce giants like Amazon, Facebook and Google.
This extension of the scope of the levy came as a shock to the giant e-commerce operators and other stakeholders as it was introduced and passed in the parliament without any discussion or deliberation. However, this extension of scope has its own challenges such as punitive tariffs, tracking the transactions through Internet Protocol [“IP”] address among others.
Tax Avoidance and Digital Services Taxes
With the advancement of technology, sale of goods and services have turned online and sequentially have increased tax evasion. Governments around the world are of the opinion that big tech companies do not pay their fair share of taxes.
In that regard, the chorus for modernizing the digital tax system is rising louder all around the globe. And, almost 40 unilateral measures concerning Digital Services Taxes [“DSTs”](used synonymously with equalisation levy) are either taken or are under consideration by various governments.
Digitalization with the revolution in the telecommunication sector has changed the ways of business operations, attracting loopholes for tax evasion. Multinational enterprises [“MNEs”] use base erosion and profit shifting [“BEPS”] strategies in order to find and exploit gaps in tax laws to avoid paying taxes.
To curb the said and other similar problems, the Organisation for Economic Co-operation and Development [“OECD”] is working on a global tax plan to help address the challenges arising from digitalization of the economy. In furtherance of that, G20 nations and the OECD came up with the OECD/G20 Inclusive Framework on BEPS Project under which over 130 countries and jurisdictions have collaborated and are co-operating to ensure a comparatively more transparent tax environment, tackle tax-avoidance and improve the coherence of international tax rules (BEPS Package).
In addition, this year the OECD has also decided to step forward with a two-pillar approach as part of its BEPS project in order to provide solutions to various tax challenges emerging from the digitalization of the economy. The first pillar is concerned with finding solutions to determine the allocation of taxing rights however, the second pillar deals with designing a system under which the MNEs pay a fair share of tax on their profits.
The Indian Equalisation Levy
To collect its revenues in the form of DSTs the Indian government introduced its own form of DST i.e. equalisation levy (or the so-called Google Tax).
India’s Equalisation Levy in 2016
Section 165 of Finance Act, 2016 imposed a 6% equalisation levy on certain ‘specified services’ i.e. online advertisements or any provision, facility or service concerned with online advertisements. This levy centred on B2B transactions and it applied only if the aggregate amount received or receivable by a Non-Resident [“NR”] service provider in a financial year exceeds Rupees One lakh.
Equalisation Levy- Widened Scope
The scope of equalisation levy was extended vide Part VI of the Finance Act, 2020. And now, an NR ‘e-commerce operator’ is liable to pay 2% tax on the funds received or receivable by him as consideration from ‘e-commerce supply or services’ made or provided or facilitated by it. In other words, the supply of e-commerce services to an Indian resident by an NR e-commerce operator are subject to equalisation levy (B2C). The levy pegged at 2% is very broad in nature as it covers online marketplaces, search engines, online streaming services and platforms based on subscription among others.
Nonetheless, the levy is not charged in case if the e-commerce operator has a Permanent Establishment [“PE”] in India and the e-commerce supply or services is effectively connected with such PE or the annual turnover of the e-commerce operator on which otherwise the levy at the rate of 2 % is applicable, is less than two crore rupees (USD 2,67,000 approx.) in the previous year.
Widened Levy and its Tracking Challenges
Interestingly, the levy is also chargeable in case if the e-commerce transaction remains perfectly between two NRs but the IP address is located in India.
However, tracking the transactions through IP address has its own issues and challenges such as firstly, how can an e-commerce operator track the transaction if the service recipient is using an IP address which is not located in India, secondly, how can an e-commerce operator know that the service recipient is an Indian resident or not, thirdly, how can Revenue track the transactions between two NRs in case if the customer uses the IP address located in India on the receipt of e-commerce supply or services from the e-commerce operator.
Possible Impact on Business Model
Notably, the new levy will have an adverse impact on the buying behaviour of the consumers as the total cost of services or sales would see a surge with the imposition of the levy. Many small traders in India rely on the e-commerce platform for the sale of their goods. The levy would be a setback for these traders as there are high chances that the e-commerce giants would pass on the tax burden to the small traders.
For e.g., e-commerce companies such as Amazon which act as a middleman between businesses/merchants and consumers might increase the commission it charges merchants, which could, in turn, result in higher prices for consumers.
Punitive Tariffs and Risks Involved
As has been noted above, India has adopted a 2% equalisation levy and the same was made applicable from April 1, 2020. Now, with regard to the imposition of the said levy on various e-commerce companies, the United States of America has launched an investigation on India and nine other jurisdictions as it is alleged by it that the companies based in the US are targeted unfairly by virtue of DSTs.
Pertinently, the US has initiated an investigation under section 301 of the US Trade Act,1974. The said section states that whenever the President determines that a foreign country or instrumentality is maintaining unjustifiable and unreasonable tariffs against US commerce, the President can impose duties or such other import restrictions as he deems fit on the concerned foreign country or instrumentality. The said section also allows the US Trade Representative to investigate and respond to the actions of the foreign country or instrumentality in question.
Additionally, the US has also threatened the above-mentioned countries and jurisdictions with economic retribution and to hit them with punitive tariffs if at all they proceed with their own DSTs.
The reason why the conundrum of DSTs could not be solved in the current international tax regime is that there is no unanimous agreement on the issue of profit-sharing of the MNEs in order to avoid the payment of taxes in foreign countries. In addition to that, though, countries such as the UK and France may have agreed to limit the scope of their proposed digital taxes, but have already planned and are aiming to proceed with their own digital taxation system if the OECD does not come with a proposal of profit-sharing by the end of this year.
In conclusion, it is to be noted that though the due date of first quarter (July 7, 2020) for deposition of equalisation levy has already been passed, several issues concerning the tracking of transactions through IP address are still unanswered. The government shall take cognizance of the same at the earliest and shall also provide for a pertinent solution.
Also, it is noteworthy that since 2013 India is also engaged in the OECD/G20 Inclusive Framework on BEPS Project to arrive at a unified and comprehensive global consensus, to make the digital giants pay their fair share of taxes. But, instead of waiting for a global, consensus-based solution on the said issue, India and various other countries and jurisdictions which are part of OECD/G20 Inclusive Framework came up with their own unilateral version of DSTs which they will withdraw once the consensus-based solution is reached.
Nonetheless, such unilateral measures taken by these jurisdictions portrays that they are serious about finding a solution and offer concrete examples of what the consequences will be if no global consensus is formed on the issue of DSTs in the near future. Internationally, such unilateral levies come along with their own risks such as high punitive tariffs etc. and in the case of India, it might also affect the upcoming US-India trade deal. Therefore, in order to avoid such trade-conflicts countries and jurisdictions shall continue to move forward with the above mentioned two-pillar approach and implement the BEPS Package.
Authored by: Navin Parik and Namit Jain
Institute Of Law, Nirma University
Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy, OECD, January 30, 2020, Available Here
The Finance Act, , §165 (2016)
The Finance Act, §153, (2016) inserted vide The Finance Act, 2020 (w.e.f. April 1, 2020).
Office Of The United State Trade Representative, Federal Register, Vol. 85, No. 109/ 2020 (Issued on June 5, 2020).
The U.S. Trade Act, § 301 (1974)