Equalization Levy: An Update

  Audio Version Given Below

 

 

The ‘Equalization Levy’ has been in the news once again. This is because Government of India widened the tax bracket of Equalization Levy in the Finance Act 2020, passed on March 27^th 2020. Now it is commonly being referred to as ‘Equalization Levy 2.0’. The first instalment of widened Equalization Levy falls due on 7^th July 2020.

In this article, I shall try to discuss the concept of ‘Equalization Levy’ (EL)  and the impact of the same.

Before we move ahead, let’s understand the basic meaning of equalization levy. Many non-resident companies (Facebook, Amazon, Microsoft, Netflix, Google to name a few) are engaged in digital business in India.  They earn income from India but they escape the tax net taking the advantage of Indian tax laws. This is unfair for domestic companies doing similar businesses here. So to bring the non-resident companies at par with Indian companies in terms of tax, a levy known as ‘Equalization Levy’ (commonly known back then as ‘Google Tax’) was introduced.

Introduction and Need of Equalization Levy

EL was originally introduced in the Annual Budget of 2016 by Government of India. It came into effect from 1^st June 2016. It was introduced by adding a separate chapter in the Finance Act 2016 and is not part of the Income Tax Act.

As per the report by the Committee on Taxation of e-Commerce, CBDT (Government of India), EL was recommended to reduce the unfair advantage in tax enjoyed by multinational entities engaged in digital business over the Indian companies. The Committee studied the OECD’s report on Base Erosion & Profit Shifting (BEPS) Project. This project aimed at identifying the challenges in tax with the advent of the digital economy. This OECD report has been accepted by G-20 countries. It means these countries have a common view on this issue.

Before the EL was introduced, as per the Income Tax Act, a non-resident could only be taxed in India in either of the following conditions:

a)  Royalty Income

b)  Fee for Technical Services Income (FTS)

c)   General Residual Category of Business Income

However, the income earned by the non-resident multinational entities engaged in digital business in India could not be taxed in any of the above criteria.

It could not be charged as royalty as, the Indian entity paying the non-resident entity does not get any right on the servers of the latter.

Similarly, It could also not be treated as FTS because as per the tax law in India, a service rendered digitally or using technology could not be treated as technical services.

It could also not be charged as business income because, to be charged as business income, such non-resident entities must have either a permanent establishment in India or a Taxable presence in India. Permanent Establishment includes a fixed place of business through which the business of the enterprise is wholly or partially carried on.

The non-resident entities in question do not have either of these in India. Their servers are also located outside India so they could not be taxed for their income earned from India.

Equalization Levy 2016

With the introduction of EL in 2016, even if the non-resident entities did not have Permanent Establishment in India, their income from India could be taxed, if it is earned from providing specified services.

Specified services didn’t mean all services rendered by such non-resident entity but only online advertisement or providing digital advertising space.

Rate: The EL for specified services was charged at 6% of the amount received/receivable excluding tax.

Revenue Threshold: EL was not charged if the amount received/ receivable from specified services rendered is less than Rs. 100,000 in the previous year, whether paid once or paid at different times in the previous year.

Recipient of service: EL was charged in case the non-resident entity receives money from either of the following for providing specified services:

a)  Resident Indian carrying on business or profession

b)  Non-resident having a permanent establishment in India.

However, the services should be for business activity and not for personal purpose.

For Example, A company X Ltd. (Say, Facebook) provides online advertising service of Rs. 200,000 to ‘A Limited’ (an Indian company) then ‘A Ltd’ will withhold Rs. 12,000 and deposit as EL with Government of India within 7 days from the end of the month in which service was provided.

It should be noted that income received after being subject to EL is exempt from Income Tax.

Equalization Levy ‘2.0’: 2020

This widens the scope of EL and now includes a non-resident e-commerce operator providing goods or services online. The said e-commerce operator (say, Amazon) does not have a Permanent Establishment in India.

The goods or services sold may or may not be owned by the e-commerce operator. It may fall into the tax bracket even if it is just facilitating the sale of such goods or services and they belong to someone else.

Rate: The EL in case of e-commerce operator will be 2%  of amount received/ receivable excluding tax. This is paid quarterly.

Buyer: EL will be applicable if either of the following categories of buyers purchases goods/ services from e-commerce operator:

a)  Resident Indian

b)  Any person using Indian IP Address (even if such person is a non-resident in India).

EL will also apply if the e-commerce operator sells the following to a non-resident:

a)  Data of Indian residents or persons using Indian IP address

b)  Advertisement targeting Resident Indian or person using Indian IP Address.

Revenue Threshold: EL will not be charged if total revenue earned by the e-commerce operator in the financial year is less than Rupees Twenty Million.

Payment of EL: Unlike the 6% EL that is paid by the recipient by withholding, EL, in this case, will be paid by the e-commerce operator.

The same is to be deposited with the Government of India within 7 days from the end of the quarter in which goods/services were sold.

For Example, company P Ltd. (Say, Amazon) sells goods worth Rs. 30 Million to Resident Indians and persons using Indian IP Address in a Financial Year, then EL of Rs. 600,000 will be charged and deposited by P Ltd.

Another example can be if X Ltd (Say Facebook) sells an ad of a hotel in Australia and targets it to Indian customers.

From the above example, I would like to point out a difference in situations:

 If X Ltd provides online advertising services to A Ltd (An Indian company) then A Ltd withholds the EL @ 6% and deposits it with GoI.

However, if the same X Ltd. provides online advertisement service to a hotel in Australia, targeting it to Indian customers then the EL will be paid by X Ltd. and that to at a lower rate of 2%.

So we need to remember, the EL of 2020 is just an addition and not a replacement of 2016 EL.

Impact of Equalization Levy in India

Now that the scope of EL has widened, let's see the industries impacted due to this levy as a whole.

Social Media Companies and Search Engines: In my opinion, social media and search engines (say, Facebook, Google) were the first to be affected. We see ads of Indian and foreign companies on social media and search engines promoting their products/services. EL on online advertising services has been there since 2016. Now as per 2020 EL even ads of non-resident companies shown by these companies will be taxable.

Online Marketplace: Online marketplaces like Amazon will be affected. Amazon provides a platform on which products owned by others are hosted for sale.

Cloud Computing Companies: Companies that are engaged in providing software or infrastructure online as a service will be affected. For example, Microsoft provides OneDrive cloud storage or Office 365, an online Office Suite.

Online Content Hosting: Today we watch online movies on Netflix. It is a content hosted online. Such companies will get affected. Amazon also hosts online content in terms of movies etc.

So, we need to understand that just the company selling goods online is not a market place. Services can also be sold online, as described above.

Recent Developments

Following developments have taken place after the introduction of EL 2020:

a)  USTR Investigation: The Office of US Trade Representative notified on 2^nd June 2020 about initiating an investigation in the Digital Services Taxes (DST) of India and a few other countries including UK, Spain, Italy and EU countries.  The investigation is started under section 301 of the US Trade Act. It empowers the USTR to determine if policies of countries under investigation are discriminatory to the US. If such investigation is found true then the USTR can recommend imposing tariff, duties or trade sanctions on that country.

The consultations with India are to be held.

b)  Change in ITNS 285 Challan: As the first due date of deposit of EL for e-commerce operators is on 7^th July 2020, so paving way for the deposit, the Income Tax Department, GoI has amended the ITNS 285 Challan to include ‘e-commerce operator for e-commerce supply of services’.

Even though the widened EL has been effective for three months but I would say it is still in a nascent stage. Clarifications are required in some points. FAQs on the widened EL are awaited.

Conclusion

With the introduction of the levy in its expanded form, sooner or later, these online services will see a price rise, as these companies may pass on the tax burden to consumers.

This may lead to small shrinkage in demand for these services, still, I would consider it as a good step for the Indian economy as a whole. This has opened another stream of revenue for the Government from those companies which were escaping the tax bracket all these years for the income earned in India.

***

I hope you all found this article informative and interesting. I will try to post interesting articles in an easy language in this blog. Please keep following and also do share your thoughts about the blog and suggestions for future posts. You can ask me questions in the comments section or mail them to me at askme[at]aseemjavablogs[dot]com and I will try to answer them.

Want to read other articles? Click HERE