Equalisation Levy, a Step Towards Resource Mobilisation

• Introduction: Need for a Tax to Capture Digital World
• Amendment in Finance Act 2020
• When is it to be levied?
• An exception to the Levy
• Collection of Equalisation Levy
• Interest on Delayed Payment
• Penalty on failure to deduct Equalisation Levy
• Furnishing of Statement and failure to furnish a statement
• Appeals and Punishment
• My Views
• Suggestions

Introduction: Need for a Tax to Capture Digital World

In 2012 Amazon launched its first website in India which served as a base for the customers to compare the online prices of various commodities, which was the starting era for the digital economy in India. The Social Media and the other online platforms were becoming more of a hotspot not just only for the Indian Market but the other countries as well. In 2015 the Indian E-Commerce industry was valued around US$ 20 billion and is expected to grow to US$200 billion by the year 2027. The digital market was growing at a tremendous rate. The platform was proving as a base for re-shaping, not just only Indian business but across the globe. India was one of the Asian countries which saw a rapid growth rate with more and more of purchasing and selling being done online. With a huge amount of revenue being generated through these platforms, there was no payment of taxes by them as they were not having their Permanent Establishment in India, and this was creating significant economic pressure on the Government. As per the OECD (The Organisation for Economic Co-operation and Development), the income tax collection for the big player of the digital economy could go around US$100 billion. The taxation of the Digital Economy was the need of the time and one of the most important reasons being the Companies to avoid their tax demands used to get them registered in Tax Havens. The Ministry decided to levy the tax as the E-commerce companies were enjoying an unfair advantage over the business conducted normally. Introduced in the Finance Bill 2016 in Chapter VII by Mr. Arun Jaitely; Equalisation Levy was the government step for moving towards Resource Mobilisation. With the world growing toward the digital economy and working in cyberspace a proper tax reform was required. Introducing Equalisation levy was the action plan 1 of OECD (Organization for Economic Cooperation and Development) of the base erosion and profit shifting project.

As per Section 165 of the Finance Act, 2016 Equalisation levy is the tax leviable on consideration received or receivable for the specified services by a Non-Resident not having a Permanent Establishment in India, levied at the rate of 6% on the gross consideration, received/receivable from the non-resident having a Permanent Establishment in India or from the person Resident in India. But exactly what the Specified Services are, so specified services include:

Some of the services identified were Cloud Computing, Online Marketing, Use of Platform Services, etc.

The conditions for levying Equalisation Levy are:

1. i) Business to a Business transaction is covered.
2. ii) The aggregate consideration should exceed Rs. 100000.00.

iii) The payment of consideration should be for business or profession carried out in India.

Suppose Mr. Rajat has availed the online advertising facility of Google which is outside India for his Car Manufacturing business in India, for which he made a payment of Rs. 500000.00. On this consideration Equalisation Levy at the rate of 6% i.e. Rs. 30000.00 has to be paid. Only when the tax withheld has been paid to Government, then only the expenditure would be allowed as a deduction.

In the budget of 2020-21, there was no proposal for amendment in Finance Bill 2016 however, when the Finance Bill 2020 was in the process of Legislation the amendment was brought out.

Amendment brought out in Equalisation Levy in the year 2020: 

The Finance Act 2020, from 1st April 2020 extended the scope of equalisation levy of the supply of goods and services by the E-commerce operator as well.

But who is an E-Commerce Operator? A new clause ca is added to section 164 of the Finance Act, 2016 which defined an E-Commerce Operator is a Non-resident who owns, operates, or manages the digital or electronic facility for the online sale of goods or online provision of services or both. And another section cb was added which further defined online sale of goods or services, which is defined as E-commerce supply or services means:

This levy has come into effect from 1^st April 2020 and would be charged at the rate of 2%.

The question arises, in what cases is it to be levied?

The tax is to be levied in case of the supply of goods and services by an E-commerce operator only when the goods and services are supplied/facilitated to:

The levy could be better understood with an example. Mr. Ashutosh a Resident Individual, residing in Bangalore purchases a television set from Amazon which is a Non-Resident, Mr. Ashutosh placed his order through his laptop having an IP address of India so the consideration would have been paid to Amazon which is an E-commerce operator, and so would be covered under the amended Equalisation Levy.

We could also consider another scenario a Non Resident person having a Permanent Establishment in India purchases goods for his business in India, the machine used by him for placing his order would be having an IP address in India and the order placed on Walmart, so Walmart here being the E-Commerce operator a Non-Resident would be liable for payment of the levy.

Exceptions to the Levy: 

The exceptions where the Equalisation Levy in case of E-commerce transaction would not be levied as per section 165A of the Finance Act,2020 are as follows:

Collection of Equalisation Levy:

Interest on Delayed Payment:  As per Section 170 of the Finance Act, 2016 Interest at the rate of 1% per month would be levied for a month or a part of a month of the tax not credited to the Government for the period delayed.

Penalty for failure to deduct Equalisation Levy:

Furnishing of Statement and Failure to furnish:

Appeals and Punishments:

My Views in Favor:

• As most of the people have switched over to the electronic platform for purchase and sale of their commodities, therefore a large amount of revenue was generated from the same. Equalisation Levy on specified services was already introduced in India but furthermore, transactions were to be covered which was the sale of goods and services on the online platform, which was introduced as an amendment in the Finance Bill 2020.

• The tax collection and deduction method in the case of Equalisation Levy are moreover the same as the TDS process. Likewise TDS the deduction of the expenditure would be provided only when the levy has been deducted and deposited to the Government. So the process is easy to understand.

• In 2017 the Digital Economy accounted for around 6.9% of the US Economy and the gross output has been increasing around at a rate of 2.1% which of course would be beneficial for the World Economy.

• Equalisation levy is India’s fair share from the Revenue earned by the players of the Cyberspace. The Amended Act has included the E-commerce operator and E-commerce supply has been added in the Finance Act, 2020 would cover a vast amount of transactions, as of today even a small thing like a needle can be traded on the online platform.

My Views Against:

• However the big companies such as Amazon. Google, Microsoft, etc have not welcomed the move by the Government of India, as they have found it discriminatory and this would negatively affect the companies. As the levy has to be paid by the operators on their revenue and 2% of this is considered by them as a big amount. During the current scenario, the companies are not in favor of any extra burden on them.

• Apart from that, there is no clear definition of the "consideration" on which the tax is to be levied. Some of the companies have proposed that sales, turnover or gross receipt should mean only the facilitation fees for the consideration purpose, as mostly what happens is that the online platform acts as a mediator between the buyer and seller so the consideration can be a point of confusion with the full amount the customer would be paying to the seller and this would also be included then and would increase the base amount of the levy. Suppose if we purchase a Dell laptop from Amazon and the amount paid for the same is Rs. 70000.00, and Amazon keeps Rs. 20000.00 as its charges, so there is no clarity on whether Rs. 70000.00 or Rs. 20000.00 would be the consideration for Equalisation Levy.

• If we compare the Equalisation Levy charged in India, the percentage of levy of 6% in the case of specified services is more as compared to around 3% of the European Nations. The Equalisation Levy is not a part of the Finance Act, 2016 so the point of concern for the Companies being there might be double taxation, and maybe they would not be benefitted by the Double Taxation Avoidance Agreement or the Tax Exchange Agreements between the Countries.

• The drawback of the levy being the burden of the tax would be shifted upon the Business entities in India and the startups, as the recovery amount would be charged from the recipient of the service. However, the exemption limit of Rs. 1 Lakh and Rs. 2 Crore for specified services and E-Commerce operator respectively are a relief for the small businesses.

Suggestions: 

• With the introduction of GST in India, the Government is bringing more transparency in the revenue collection system of the country. In the case of E-commerce operator with compulsory registration under the GST law, the operator needs to pay 1% GST on the consideration received in addition to Equalisation Levy. So dual tax has been charged on the same and would increase the expenses. The Government should further clarify the levy to avoid double taxation as this would impact the businesses in the country.

• Apart from that, the Government could also give clarity regarding the applicability of MAT in the case of the E-commerce operator.

• If Equalisation Levy would not be implemented properly rather than providing benefit to the country would prove burdensome for the small players of the digital economy.