The equalisation levy 2020, regardless of the lofty intention behind it, suffers from serious flaws and seems fashioned to dodge existing tax treaties.
By Sachit Jolly
Equalisation Levy (EL) was introduced in India in 2016 (EL-2016) to tax advertisement revenue received by non-resident taxpayers like Google, Amazon, etc. from India. EL has now been expanded (EL-2020) to tax non-resident e-commerce operators for sale of goods or services by such operators itself or facilitated by them.
EL-2020 will have a significant impact on non-resident providers of digital supply or services, considering the expansive definition of the terms ‘e-commerce operator’ and ‘e-commerce supply or services’. Apart from non-resident online platforms, even travel aggregators, subscription-based platforms, paid search engines, streaming and online gaming, e-music, e-movies and e-books appear to be within the scope of El-2020. Interestingly, EL-2020 did not form part of the original Finance Bill, 2020 which was introduced in the Parliament. It found its place only in the amendments to Finance Bill, 2020 moved by the Finance Minister and the amended Bill was passed by the Parliament without any discussion. In effect, the EL-2020 was never discussed or debated in Parliament or put for public consultation. However, that is not the only shortcoming.
Purchase made by a non-resident on an e-commerce platform, owned or operated by another non-resident is brought to tax solely because the purchaser used an IP address located in India. Imagine a situation where a US resident, stuck in India due to COVID-19, placing an order on a non-resident e-commerce operator for delivery of food or medicine to his/her spouse in the US being subject to a levy because he/she used an IP address in India. The extension of EL to sale of advertisement or data between two non-residents and making it contingent on nebulous phraseology like “targets a customer in India” raises questions of arbitrariness. Perhaps that’s why leading industry organisations like Japan Electronics and Information Technology Industries Association (JEITA), and U.S.-India Business Council (USIBC) have sought deferral of the levy in its present form.
Secondly, if one were to analyse the relevant OECD BEPS Report and the report of the CBDT’s e-commerce taxation committee, to which the EL traces its origin, it is obvious that EL was proposed to achieve tax neutrality between domestic and foreign taxpayers and the need for its introduction being traced to the hurdles in amending existing Double Taxation Avoidance Agreement (DTAA), which, DTAAs cater to income tax.
Interestingly, after extensively quoting from the OECD Report, including on purpose and need of EL, the CBDT Report concludes that EL is a transaction tax and inherently different from income tax. This is contrary to the statement of the then revenue secretary, Hasmukh Adhia, when he said, “Although people are viewing it as indirect tax, this is a direct tax.” In fact, it would be interesting to know from the CBDT and the CBIC, whether the collections from EL would go towards meeting “direct tax” or “indirect tax” targets, knowing that achieving targets is one of the basis for promotion in both the departments.
One cannot fault the frustration of the tax authorities in India and their consequent endeavour to camouflage EL as a “transaction tax” in a separate chapter in the Finance Act because any income tax levied under the Income Tax Act is subject to applicable DTAA. However, introduction of EL as a separate chapter in the Finance Act, does not alter the basis character of the EL. There is enough jurisprudence to suggest otherwise. Overwhelming evidence suggests that EL has all the attributes of an “income tax” and is, in effect, an alternate “income tax”.
EL may have very laudable objects of attaining tax neutrality. The morality of multinationals in structuring their transactions in a manner to reduce taxation in the source nation has also been called out by many countries. Can those objects and concerns be a good enough reason to dodge existing tax treaty obligations? Perhaps not.
The income tax authorities in India are likely to push for EL and if one goes by the recent report prepared by the income tax department, EL could be expanded to cover for the shortfall due to COVID-19. The taxpayers, on the other hand, will have the option of either challenging the Constitutional validity of the EL, on grounds of extra-territoriality and arbitrariness or disputing the liability itself, being saved by DTAAs. In either case, it will be interesting to see how the Court in India react to the “moral tax” imposed by the Parliament by “dodging” existing Tax Treaty obligation.
The author is Partner DMD Advocates. Views are personal