This article is written by Chandana Pradeep, from the School of Law, University of Petroleum and Energy Studies, Dehradun. This article analyzes issues that are faced when e- Businesses-ESS EQL are being taxed.
The very need for why taxes are and have to be paid has always been a question arising in our minds. The purpose of a tax is for raising revenue so that the government can use that money to do resourceful work. The best type of taxation system that a country should have should be one which does not require the government to borrow on a large scale but also gain sufficient revenue.
With the start of globalisation and the development of e-commerce, it has caused big challenges to come forward with the taxation system. Before the development of these types of business, goods were mostly in physical forms and they could be tracked and distributed more efficiently, however with the development of e-businesses, this has not been the same and cannot be taxed easily. Global commerce has increased exponentially having trade through all cross borders and having less transparency as before, which makes it difficult for taxing to take place and more loopholes are created to evade tax.
Background of equalisation levy
The information technology sector has developed so much in the last decade that there has been the introduction of various businesses in the online platform, which has given rise to various kinds of business models and dependence on technology and digital networks.
This has caused a sufficient amount of challenges when filing for tax especially the areas where there are characterisation and valuation of data. The combination of the inadequacy of physical presence based nexus rules in the existing tax treaties and the possibility of taxing such payments as royalty or fee for technical services creates a fertile ground for tax disputes.
There was clarity lacking in how to file tax for these types of business and hence in the Budget 2016, the equalisation levy was introduced to bring in more clarity.
Brief on the report of the Committee of Taxation on e-commerce
There was a committee that was formed by the Central Board of Direct taxes so that there could be an analysis done to pinpoint the issues which were faced by the direct tax in the e-commerce industry and come up with plausible solutions for the same. The report of the committee was taken into consideration in the year 2016 for when the Finance Bill, 2016 was formulated.
With the development of the information and technology industry, there have been challenges arising everywhere, and India is no exception to that. These new business models have also created new tax challenges in terms of nexus, characterization and valuation of data and user contribution. These challenges have been recognized by the international community, leading to their inclusion in the Base Erosion and Profit Shifting (BEPS) Project endorsed by G-20 and OECD.
There have been issues that have been rising with how the payment is being done for digital goods and services and how they are more of a challenge for a country like India, which has taxation of royalty for technical services. There have been other issues that have been rising, which are multinational companies and enterprises evading from paying taxes.
For these issues, the committee came up with three solutions which are a new nexus based on significant economic presence, a withholding tax on digital transactions, and an equalization levy. After deeply analysing the pros and cons, the method of equalisation levy was found to be simpler to integrate into the domestic laws of the country and this would not be in the ambit of the income laws and it was recommended that an equalisation levy of 6% had to be charged for any online advertising or any such activities. The committee also recommended that reporting the equalisation levy should be one in a simple manner, as well as the option to do so, should be made available on an online platform as well.
Need for equalisation levy
With the pandemic making its way throughout the globe, the government of India has introduced the concept of equalisation levy on consideration received by non-resident e-commerce operators for e-commerce supply or services at 2% (hereinafter referred to as ESS EL) at the enactment stage of the Finance Bill, 2020, around the end of March and, with effect from 1 April 2020. This was a sudden move by the government which caused a lot of anxiety and distress among the taxpayers and due to this sudden action, the US government has also initiated an invitation for discrimination of US companies under Section 301 of the Trade Act, 1974.
Features of equalisation levy
The impact has to seen
The equalisation levy is not part of the income tax and is not subject to the same, the rate of the equalisation levy which has been decided is 2% or 6% depending on the situation. And to understand the impact that the equalisation levy has to look at the credit a person has for withholding the limit of credit that is available in the country which they are a resident of.
The equalisation levy does not apply in cases of:
- When the permanent office of the e-commerce is in India and that is from where the supplies are primarily manufactured from.
- The transactions which are covered in the Finance Act, 2016 for equalisation levy,
- When the sales, turnover etc is more than 20 million rupees in a year.
Definition of e-commerce
The definition of ‘e-commerce operation’ is very wide in its ambit. It is defined as a non-resident who owns, operates or manages a digital or electronic facility or platform for online sales of goods or online provision of services, or both. Some of this e-commerce business could not have been taxed before, as there was no connection of them with India, as they did not have any permanent office, but now the taxes can be levied with the help of an equalisation levy.
For the levy to be collected, the operator of the e-commerce who is a non-resident has to submit quarterly and if the payment is not paid within the said date, there will be a fine of 1000 rupees daily till the payment has been done. Therefore, it is clear that the onus of paying this amount solely lies on the non-resident operator.
Exempted in the Indian tax law
The levy of 2016 is as per the Finance Act,2016 and does not fall under the Income-Tax Act hence, this causes a probable chance for there to be double taxation and for the overall tax of e-commerce to increase.
Extraterritorial operation is when a transaction is being done by non-residents of India, where the manufacturing unit is in India can have the taxes levied as per this equalisation levy. Even where the transaction is between two non-residents, the payment is made from a foreign bank account, and the goods or services consumed overseas could be subject to the levy, merely due to using an India IP address.
Scope of the EQL provision
This new technique is used to levy a tax on any product or service which has been digitised such as when there has been digital offering of any books or games by non-residents, then the tax can be levied. When a service fee is paid by an Indian resident for the service of the e-commerce, then this tax can be levied and would be subject to ESS EL. but, if the e-commerce platform is only facilitating a service, then this tax cannot be imposed on it. All the provisions relate to how the ESS EL are levied. They are wide in nature and how the same can be interpreted depends on cases to case basis. What all comes under the category of e-services. The definition of e-services has a wide scope, and the following are what falls under this category of e-services:
- Where the e-commerce operator owns the online sale of goods.
- Where the e-commerce operator provides the services online.
- When the operator provides a specific platform for others to trade goods and services online.
- Or any situation where it is a hybrid of any of the above situations.
Penalties of not filing tax payments on time
- In case, there is a delayed payment then the interest of 1% for any outstanding amount at the start of every month.
- The penalty for failure of making the payment is Equalisation Levy not deducted: Penalty equal to the amount of levy failed to be deducted (along with interest and depositing of the principal levy outstanding).
- Equalisation Levy deducted but not deposited: Penalty equal to INR 1,000/day subject to the maximum of the levy failed to be deducted (along with interest and depositing of the principal levy outstanding).
- Disallowance of such expenditure in the hands of the payer (unless the defect is rectified).
- The payment for not filing the compliance on time is 100 rupees per day till the non-compliance continues.
- If there has been a false statement that has been filed then, the person can face a punishment of imprisonment for up to three years.
Challenges faced by taxing of e-business
There are an ample amount of challenges which are being faced due to the levying of this tax.
Interpretation is not clear
The interpretation of the term “online provision of services” is not clear, as when it is read it means where the goods and services are online, but it creates a point of confusion in areas where the contract is being done online, but where the delivery is being done offline.
Consideration is not clear
There has been widespread confusion among service providers on how the EQL has to be levied, whether it is supposed to be only on the facilitation fee or whether it has to be on the entire consideration which has been received, as well as the service providers are not clear as to whether the indirect taxes would be applicable or not on this.
The expanded scope of EQL was to be applicable from 1 April 2020 and to avoid double taxation the income-tax law provides for tax exemption on income subject to EQL. The exemption is however applicable from 1 April 2021, leading to possible double taxation during the financial year 2020-21. This can be a problem to many foreign companies because they will have to pay tax based on EQL as well as not pay taxes to Indian entities and this can be a cause for a long litigation process.
Usage of a digital or electronic platform
The scope of “usage of the digital or electronic platform” has not been mentioned in the Act. Therefore, there is a lot of chaos which arises from how this phrase has to be interpreted, this can be a very big issue as the service providers will not be knowing if the EQL tax will apply to them or not.
- It should be cleared whether digitised goods and services include goods and services which are available offline or not.
- Dispute resolution provisions should be at one’s disposal when disputes arise.
- When a non-resident pays the equitable levy tax considering there is no connection with India and later the opposite is found out, the amount should be adjusted accordingly.
The tax that has been levied was a complete surprise in the Finance Act, 2020 and with this, there has been a lot more chaos than expected. With globalisation taking place and new developments happening each day, more and more difficulties are yet to arise with regard to e-commerce and e-business are going to happen and these difficulties can only be known with the passing time, which have to be solved as soon as possible, as, without clarity, the functionality of even the taxes being levied will be of no particular use.
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