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Expansion of Equalisation Levy – Impact on Overseas E-Commerce Companies

Equalisation levy on e-commerce supply or services has been the subject of some debate over the last few years. The Central Government has proposed to introduce certain changes in the aforesaid regime vide the Finance Bill, 2021 (“Bill”).

Background

Introduced by the Finance Act, 2016 (“2016 Act”), initially equalisation levy was brought in to tax the online advertising fees paid to overseas e-commerce companies such as Facebook, Google and Amazon by a person resident in India and carrying on business, and/or profession or a non-resident having a Permanent Establishment (“PE”) in India (refer to our article at https://www.mondaq.com/india/corporate-tax/504032/overseas-e-commerce-companies-to-be-subject-to-tax-deductions for more details).

Subsequently, the ambit of the equalisation levy was further expanded by the Finance Act, 2020 (“2020 Act”) with the taxation of ‘e-commerce supply or services1’ at the rate of 2%, with effect from April 1, 2020, of the amount of consideration received or receivable by an e-commerce operator2 from e-commerce supply or services made or provided or facilitated by it (i) to a person resident in India; or; (ii) to a non-resident in specified circumstances3; or (iii) to a person who buys such goods or services or both using internet protocol address located in India.

The equalisation levy introduced vide the 2020 Act was not chargeable in case:

(i)         where the e-commerce operator making or providing or facilitating e-commerce supply or services has a PE in India and such e-commerce supply or services is effectively connected with such PE;

(ii)        where the equalisation levy is leviable under Section 165 of the 2016 Act;

(iii)       sales, turnover or gross receipts, as the case may be, of the e-commerce operator from the e-commerce supply or services made or provided or facilitated under Section 165A(1) of the 2016 Act (introduced by Section 153 of the 2020 Act) is less than two crore rupees during the previous year.

Amendments Proposed in the Bill

The Bill inter alia proposes the following amendments/clarifications pertaining to equalisation levy introduced by the 2020 Act:

(i)         The Bill has clarified that the consideration received or receivable for specified services and for e-commerce supply or services shall not include the consideration, which are taxable as royalty or fees for technical services in India under the Income Tax Act, 1961 (“IT Act”) read with the agreements notified by the Central Government for avoidance of double taxation (“DTAA”).

(ii)        The Bill has inserted an explanation to clarify the scope of “online sale of goods” and “online provision of services” to include any one or more of the following activities:

·                acceptance of offer for sale; or

·                placing of purchase order; or

·                acceptance of the purchase order; or

·                payment of consideration; or

·                supply of goods or provision of services, partly or wholly.

(iii)       The Bill provides that the consideration received or receivable from e-commerce supply or services shall include consideration for sale of goods/provision of services irrespective of whether the e-commerce operator owns the goods or whether service is provided or facilitated by the e-commerce operator.

The aforesaid amendments/clarifications shall be deemed to have been made with effect from April 1, 2020.

Comments

Clarification with respect to non-inclusion of consideration which are taxable as royalty or fees for technical services in India under the IT Act or the applicable DTAA from the purview of equalisation levy ensures that royalty and fee for technical services will continue to be taxable under Section 9(1)(vi) and Section 9(1)(vii) of the IT Act respectively read with relevant provisions of the DTAA and not as equalisation levy (as some companies had opted to pay this levy due to the lower tax rate).

The clarification as to the activities which constitute “online sale of goods” and “online provision of services” provides the instances in which the obligation to pay equalisation levy will arise and as per the aforesaid clarification, even mere acceptance of the offer for sale will bring the aforesaid transaction within the purview of equalisation levy. The intent is to bring more companies within the ambit of this levy.

The amendment in the Bill as to what constitutes consideration received or receivable from e-commerce supply or services appears to be the most significant amendment. Under the proposed amendment, even if the e-commerce operator does not own the goods or provides/facilitates the services, the levy would be on the entire consideration received or receivable from e-commerce sale of goods/provision of services. Such revision is intended to clarify that the equalisation levy will not be levied on the commission but on the entire consideration value of the online sale of goods or provision of services. As the gross consideration received by both marketplace and inventory-based e-commerce operators would be liable for equalisation levy, it is likely that the marketplace e-commerce businesses would be subject to higher quantum of tax.

Endnotes:

[1] “e-commerce supply or services” has been defined to mean —

(i)         online sale of goods owned by the e-commerce operator; or

(ii)         online provision of services provided by the e-commerce operator; or

(iii)        online sale of goods or provision of services or both, facilitated by the e-commerce operator; or

(iv)       any combination of activities listed in clause (i), (ii) or clause (iii).

2“e-commerce operator” means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both.

The term “specified circumstances” means –

(i)         sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and

(ii)         sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India.

4  “Specified Service” has been defined as an 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 notified by the Central Government in this behalf.