The Finance Act 2020 (FA 2020) was notified by the Government of India (GoI) on 27th March 2020 giving effect to the tax proposal for financial year (FY) 2020-21. One notable change having significant implication for non-resident is the expansion of the provisions of ‘Equalization levy’ (EL) to defined e-commerce operations. As was surprising for many, at the Finance Bill stage, there was no mention of these proposals, which silently found its place in the FA 2020 without any debate either in the parliament or outside by the industry/professionals at large. Nevertheless, a law has been laid which needs to be dealt with effective 1 April 2020.
EL was introduced through the Finance Act 2016 as a separate piece of legislation distinct from the Income Tax Act, 1961 (IT Act). EL prior to the amendment had limited application bring to levy online advertisement, provision for digital advertising space and other facility/service for online advertisement. This was a step taken to bring part of digital economy under the tax net which typically remained non-taxable in India in the hands of non-resident taxpayers.
The FA 2020 has widened the scope of EL to now additionally bring within its ambit considerations in the hands of ‘e-commerce operator’ from ‘e-commerce supply or services’. For the purpose of this levy ‘e-commerce operator’ has been defined to 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. Further, ‘e-commerce supply or services’ means online sale of goods owned by the e-commerce operator or provision of services provided by the e-commerce operator or facilitation of online sale of goods or services.
EL on the new category of e-commerce operations of non-residents is applicable at the rate of 2% (vis-à-vis 6% EL on-advertisement services) on the consideration for supply or service made to (i) a person resident in India; (ii) a person who buys such goods or services or both using internet protocol address located in India; (iii) a non-resident for 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 (iv) a non-resident for sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India;
EL is not chargeable where the e-commerce operator has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment or such consideration is covered under advertisement related EL. Also, non-residents having consideration of less than INR 20 million have been excluded from the purview. Income of non-resident subjected to EL is exempt from income tax.
The e-commerce operator subject to levy is required to deposit the taxes on a quarterly basis by the 7th of the month following the quarter other than for the quarter ending March for which the taxes have to be paid by 31st March. Additional annual statement in respect of EL is required to be filed on or before 30 June following the end of the financial year.
The new provisions have wide ramification for non-residents. The government has sought to significantly widen the tax base (through EL levy) by bring within the tax fold broader spectrum of digital businesses which hitherto remained immune from Indian taxation primarily due to the exclusion enjoined under beneficial provisions of Double Tax Avoidance Agreements (DTAA). Typically, such businesses claimed non-taxability in absence of a PE in India or restricted scope of fee for technical services under DTAA. For instance, provision of software & digital products, e-com sale through overseas platform, remote online technical services (like maintenance support), online books/magazines subscriptions, non-technical research report services, etc. are typically not taxable in the hands of non-resident in light of DTAA provisions. Such businesses carried through digital platforms may now prima-facie be impacted by the new EL provisions. The coverage further extends to non-residents who facilitate such sale or provision of services through digital platform.
Digital economy adopts unique models with distinctive process flow, technology inter phase, contractual, legal & commercial arrangements, etc. making it relevant for each business to evaluate in detail the implications of e-commerce EL and deal with nuances of the new law. Given the wide ambit, it will be interesting to see how the authorities are able to monitor digital flow of data and compliance. Overall interesting times for tax professionals and challenging times for digital economy.
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