- By Rakesh Nangia & Shailesh Kumar
Since the advent of the digital economy and ability of businesses to generate revenues from a country using their user base, without setting up any physical presence/ office in that country, there is an ever-increasing concern amongst the market economies having large user base how to tax such transactions, since traditional rules of taxation and tax treaties do not allow taxation of such revenues in the market/ user economy without having a physical presence.
This issue was discussed in detail in “OCED’s 2015 Final Report: Addressing the Tax Challenges of the Digital Economy under OECD/ G20 BEPS Project”, wherein the OECD also opined that in case of digital transactions, the countries having market economy/ user base could consider charging equalisation levy “as an alternative to overcome the difficulties raised by the attribution of income to the new nexus”. Subsequent to the issuance of OECD’s report, India became the first country to introduce equalisation levy in its domestic tax law vide Finance Act, 2016. The scope of the levy, as introduced in Finance Act, 2016 was limited to certain specified ‘online advertisement and other related services’ and was to be levied at the rate of 6 per cent on B2B transactions and was not charged to transactions undertaken with individual customers in India.
However, vide the Finance Act 2020, a new provision providing for equalisation levy on revenues generated by e-commerce operators was introduced. The new provision significantly widens the scope of equalisation levy, which provides that consideration received/ receivable by a non-resident e-commerce operator, from the online sale of goods or online provision of services or a combination of both, shall be subject to 2 per cent equalisation levy with effect from April 1, 2020. New equalisation levy shall be charged on the revenue earned from either selling goods or services to Indian resident customers or other customers using Indian IP addresses or sale of data collected from Indian residents/ Indian IP address or from the sale of advertisement targeting Indian customers.
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The provisions defining scope, are so widely worded that it may affect all kind of e-commerce operators/ service providers/ aggregators generating revenues from India, such as online sellers of goods like Amazon, Alibaba.com, e-Bay, etc; online streaming/ content service providers such as Netflix, Amazon Prime, Audible, etc; online travel aggregators such as Trivago, TripAdvisor, Agoda, Bookings.com, etc. Additionally, it may also impact other non-resident service providers/ tech companies selling software/ technological solutions or services online through a digital platform owned/ operated/ managed by them to any customer in India. Further, unlike earlier equalisation levy in respect of online advertisement services applicable only on B2B transactions, these new equalisation levy provisions are applicable on every transaction undertaken by such non-resident e-commerce companies even with individual customers. It may be important to note that new equalisation levy provisions are applicable only if aggregate revenues for a non-resident e-commerce operator exceed a threshold of Rs 2 crores.
The new levy also seeks to expand its realm by bringing any person using Indian IP address under its net, irrespective of the customer is an Indian resident or not. Interestingly, e-commerce supply of services by one non-resident to another could also attract equalisation levy in case of sale of advertisement/data having nexus with India. Thus, multi-national enterprises will have to evaluate very carefully, the impact of this new charge and may need to go back to the drawing board and re-draw their strategy.
Aggressive strategies are being formulated globally, to tax digital economy transactions, considering that digitisation has defied global borders and multinationals derive large revenues via there ‘digital presence’, that escape the tax net. India, having one of the largest consumer bases and being a market economy, seems to be a leader in taking such steps to tax the digital transactions. Notably, equalisation levy is a special levy, charged by the Indian government on digital transactions, outside the purview of Indian income tax law. Thus, this is a unilateral levy, where non-resident companies may not be able to claim any tax treaty benefits.
Till the time some global guidelines are agreed upon amongst the nations, for taxation of digital transactions, the conflict between Indian domestic law provisions and various tax treaties are expected to continue. One must expect many more changes and challenges in the taxation of digital transactions in the coming time and businesses must be flexible to adapt their business models appropriately to embrace these changes/ challenges and comply with laws.
Rakesh Nangia is the Chairman and Shailesh Kumar is the Director of Nangia Andersen Consulting. Views expressed are the authors’ own.