Union Budget 2021 India: The government may use the upcoming Budget as a platform to issue necessary clarifications through necessary amendments in the tax provisions, along with detailed FAQs.
Indian Union Budget 2021-22: The Finance Act 2020 expanded the scope of equalization levy to include non-resident e-commerce operators by introducing a new levy of 2% (‘EL 2.0’). EL 2.0 is effective from 1 April 2020.
This levy of 2% is applicable on the consideration for e-commerce supply of goods or services provided or facilitated by the non-resident e-commerce operator, to any person resident in India or to a non-resident in certain specified circumstances.
An e-commerce operator means ‘a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or provision of services, as below:
a. online sale of goods owned by the e-commerce operator,
b. online provision of services by e-commerce operator,
c. online sale of goods or provision of services facilitated by the e-commerce operator or any other combination of these activities.
Interpretational and Practical challenges
EL 2.0 provisions are widely worded. This has led to interpretational issues regarding their scope and applicability. The fact that limited guidance is available on this subject has added to the confusion. Though the OECD BEPS Report, definitions in allied laws and Report of Committee of Taxation of E-Commerce 2016, could be relied upon for some of the issues, however, it may lead to unnecessary dispute and litigation in the long run.
Hence, some key aspects which merit attention in the upcoming Budget are:
# Expanse of the key terms
Several terms used in these provisions are amenable to multiple interpretations, namely “online sale of goods” and “online provision of services”. For example, it may be possible to construe that EL 2.0 should be levied even if one leg of the transaction is executed in physical form. On the other hand, on applying deductive logic, one may arrive at a different conclusion. Guidance is also required on how to construe the term “digital or electronic facility or platform”. The question grappling taxpayers is whether sale of goods or services carried out through telephone, video conferencing or through e-mail would also fall within its ambit.
Clarity is required on the terms ‘owns, operates or manages”. This would be even more significant if the conclusion is that mediums such a telephone, video conferencing or e-mail are also covered. As far as software is concerned, there is a need to clarify if EL 2.0 would be applicable in case of licensing arrangements or outright sales or both.
# Computation mechanism
In case of e-commerce operators, who do not sell their own goods or services but merely act as facilitators, clarity is required if EL 2.0 should be levied only on their commission income or on the gross sale value. Further in case any tax or other levy is part of the invoice, one needs to understand the amount on which EL 2.0 should be levied.
Sales returns is a common feature in online businesses. Clarity is required on how adjustments can be carried out on account of these while working out the EL liability.
# EL 2.0 v. Withholding Tax provisions
Currently law provides that if a transaction is covered by EL 2.0 provisions it would not be subjected to withholding tax. However, this exemption from levy of withholding tax is applicable from 1 April 2021. So, for one year any transaction could be subjected to both EL 2.0 and withholding tax. This appears to be a drafting anomaly which needs to be addressed.
Applicability in case of Inter Group Transactions
There is lack of clarity on if online purchases of goods and services made at the group level and charged back to the Indian group entities will get covered under these provisions.
Levy on transactions till the last day
The due date for payment of EL 2.0 for the last quarter is 31st March i.e. the very last day of the financial year when transactions are taking place. Taxpayers have highlighted that compliance within the stipulated time would be challenging, if not impossible. It is being pointed out that any adjustment required on account of finalization of accounts should be factored in. Needless to add that delays imply interest costs. It is hence desirable that this date is suitably extended.
Clarity is also required on the refund provisions relating to EL 2.0.
Advance Rulings / Guidance
It would be good to have guidance on availability of Authority for Advance Ruling Route for seeking clarity on applicability of EL 2.0 on taxpayer specific cases.
During its initial year of operation many practical difficulties have been posed by the pandemic in assessing the applicability on the facts of each specific case. In addition, there were challenges in modifying the IT infrastructures to capture the transactions which would be subjected to this levy. Hence, it is desirable that applicability of interest and penal provisions should be deferred by one year.
Recently US Trade representative has issued a report on India’s digital tax. One of the key findings of the report was that the provisions of EL 2.0 are ambiguous and fail to provide certainty to stakeholders. Interestingly, the government has issued its initial response, stating that this levy is in line with the recommendations of the OECD.
The government has in the recent past taken number of steps to address the concerns of the taxpayers and provide certainty and clarity on tax policy matters. The government may use the upcoming Budget as a platform to issue necessary clarifications through necessary amendments in the tax provisions, along with detailed FAQs.
(The author is National Managing Partner Tax – Grant Thornton Bharat LLP, with inputs from Richa Sawhney and Ankita Chowdhry)