The rapid growth of the digital economy has fueled a need to devise a globally acceptable, consensus-based mechanism to effectively tax the ‘digital economy’. While efforts for a global consensus are underway by the OECD, many countries such as France, Turkey, Italy, Austria, United Kingdom etc., have either proposed, announced or implemented, a Digital Service Tax (‘DST’) as an interim unilateral measure to tax digital companies.
Taking a cue from the G20 / OECD BEPS Action 1, India also introduced Equalisation Levy in 2016 (‘EL 1.0’) at the rate of 6% on non-resident companies engaged in online advertisement and related activities. The Indian government further expanded the scope of EL in Finance Act, 2020 to include a levy of 2%, effective from 1 April 2020, on consideration received by an ‘e-commerce operator’ from ‘e-commerce supply or services’ (‘EL 2.0’).
The first instalment of EL 2.0 was due on 7 July 2020. The stakeholders expected the government to defer the levy for some time, considering the COVID-19 crisis and to release clarifications on the scope of the levy. On the other hand, the United States Trade Representative also initiated an investigation, famously known as ‘the Section 301 investigation’ against India, the European Union and host of other nations on the unilateral levy of digital tax. However, the Indian government appeared steady in its resolve to tax digital transactions and merely amended the challan (ITNS 285) for payment of the EL 2.0 on 3 July 2020.
What is the fuss about?
So, if many countries are introducing unilateral digital taxes, why is there a concern over Indian EL? With the introduction of EL 2.0, many questions have resurfaced – whether it is a direct tax or indirect tax, whether is it extraterritorial – considering it has to be paid by foreign companies and not Indian customers, etc. The scope of the levy is also very broad and some key expressions such as ‘online sale of goods’, ‘online provision of services’, ‘digital or electronic facility or platform’ have not been defined. In comparison, in most European countries the DST applies only on online marketplaces, social media platforms or search engines. Further, some countries have excluded regulated financial services activities and intra-group transactions, e.g. France, Italy. Whereas, for the Indian EL 2.0, there are no such exclusions.
It would have been helpful if some clarifications were issued as regards applicability of EL to transactions in physical goods, sale of software etc. Further, for FY 2020-21, there is no exemption from income tax. This could lead to double taxation where payments are subject to both withholding tax under the income tax law and under EL too. This seems to be contrary to the intention of the government, considering the statutory exemption granted from FY 2021-2022.
Another key concern is whether the e-commerce operator will be eligible to claim a credit or deduction of the EL in the home country as EL is not a part of the Income-tax Act.
These interpretational issues are further exacerbated in absence of any explanatory memorandum to the Finance Bill, 2020. Hence, it is imperative that the government clarifies these nuances so that companies don’t have any ambiguities on the applicability of the EL provisions.
The challan was amended by the government barely three days before the first due date of instalment payment of 7 July 2020, whereby providing a Permanent Account Number (‘PAN’) is a mandatory field. Many non-resident companies do not have a PAN and obtaining the same in three working days is practically not possible, leading to unintended delay in depositing the levy and thereby interest exposure.
Overall, while it is understandable for India to impose an equalisation levy, the government should release required guidance to clarify and narrow down the scope of the levy as well as waive the interest levy for the first instalment considering the practical and administrative challenges faced by companies. Also, like other nations, the Indian government should re-affirm its commitment to withdraw the equalisation levy once a global consensus based solution is finalised by the OECD.
Shefali Goradia is Partner, Deloitte India and Pooja Dhokad is Manager, Deloitte Touche Tohmatsu India LLP)