Finance Act, 2020 has made several amendments in the Finance Act, 2016. The provisions have been amended to incorporate changes for better administration:
1. Scope: The services provided by the e-commerce operators have also brought within the ambit of the Equalization Levy.The following changes were incorporated:
- The scope of the Chapter VII of the Finance Act, 2016 was modified to include the consideration received or receivable for the e-commerce supply or services made after April, 1, 2020. [Section 153, Finance Act, 2020]
- E-commerce supply or services includes online sale of goods by e-commerce operator, online provision of services by e-commerce operator, sale of goods or provision of services through a platform operated by the e-commerce operator or any combination of these activities. [Section 164 (cb), Finance Act, 2020]
- E-commerce operators have been defined as 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 [Section 164 (ca), Finance Act, 2020]
- Equalization levy at the rate of 2% has been made applicable to the consideration received or receivable for the services provided by the e-commerce operators to a person resident in India, a person who buys goods, services or both using an Internet Protocol located in India or a non-resident if the non-resident is involved in sale of advertisement, targeted at customer who is resident in India or who has access to the advertisement through a internet protocol address located in India or is involved in sale of data, collected from a person resident in India or. Person who uses and internet protocol which is located in India [Section 165A, Finance Act, 2020].
2. Exceptions to the Equalization levy: The e-commerce operator providing services or supplying goods will not be charged equalization levy, if it has a permanent establishment in India and such supply or services is related to the permanent establishment, if the service or supply is chargeable under section 165 of the Finance Act, 2016 or if the sales, turnover or gross revenue of the e-commerce operator is less than Rs. 2 crores during the previous year. [Section 165A, Finance Act, 2020].
3. Compliance requirements: The equalization levy paid at the rate of 5% for all other specified services , except the services or supply from e-commerce operator, has to be given by the customers to the Central Government. While, in case of the supply and services of e-commerce operators, the equalization levy has to be deducted by the e-commerce operators themselves and has to be given to the Central Government. [Section 166, Finance Act, 2016; Section 166A, Finance Act, 2020]
In essence, Finance Act, 2020 has amended the Finance Act, 2020 to incorporate equalization levy provisions for taxing e-commerce operators.
Amendments in the Income Tax Act, 1961
The aspects of direct taxation are discussed in reference of the amendments to the Income Tax Act, 1961 by the Finance Act, 2020. The concept of Significant Economic presence was first introduced in the Income tax Act, 1961 by the means of an amendment through the Finance Act, 2018. Income Tax Act, 1961, CGST Act, 2017 and IGST Act, 2017 were amended by the Finance Act, 2020 to incorporate further reforms. This part is sub-divided in various sections which elaborate upon the amendments in reference to significant economic presence.
The concept of Significant Economic Presence was first introduced by the Finance Act, 2018 [Section 4, Finance Act, 2018]. It amended section 9 of the IT Act. Explanation 2A was inserted in section 9, to clarify that significant economic presence of a non-resident would constitute business connection. The Finance Act, 2020 amended the Finance Act, 2018 Significant Economic Presence. The explanation 2A inserted by Finance Act, 2018 was scraped and new explanations 2A and 3A was inserted in section 9 of the IT Act, which are as follows:
“Explanation 2A.—For the removal of doubts, it is hereby declared that the significant economic presence of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose, shall mean—
(a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or
(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed:
Provided that the transactions or activities shall constitute significant economic presence in India, whether or not—
(i) the agreement for such transactions or activities is entered in India; or
(ii) the non-resident has a residence or place of business in India; or
(iii) the non-resident renders services in India:
Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.”
“Explanation 3A.––For the removal of doubts, it is hereby declared that the income attributable to the operations carried out in India, as referred to in Explanation 1, shall include income from––
(i) such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India;
(ii) sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India; and
(iii) sale of goods or services using data collected from a person who resides in India or from a person who uses internet protocol address located in India.”;
(iv) after Explanation 3A as so inserted, the following proviso shall be inserted with effect from the 1st day of April, 2022, namely:––
“Provided that the provisions contained in this Explanation shall also apply to the income attributable to the transactions or activities referred to in Explanation 2A.”
The threshold for SEP has not been notified by the Government yet. The transactions of the e-commerce operators which trigger the equalization levy, also lead to generation of income under this explanation. However, in order to avoid taxation of the non-resident e-commerce operators, an exception has been created under the Income Tax Act, 1961.Any income arising from any specified service, chargeable to equalization levy is not included in computing the total income, for the purpose of Income Tax Act, 1961. [Section 10 (50), Income Tax Act, 1961] The report of OECD regarding taxation of Digital Economy is likely to be released by December, 2020 and thus, the threshold will be set after considering the OECD report.
Challenges in Implementation of Equalisation levy
These amendments for the taxation of the digital economy, though well-intended, have led to certain challenges in implementation of the same. They are:
- Constitutional Validity of Equalisation levy: Constitutional validity of Equalization levy is in question because of the mode of legislation of the equalization levy and the power of the conflict in the subject matter of the states and Centre. Article 265 of the Constitution of India states that:
“No tax can be imposed except with the authority of law.”
There are three lists under Schedule VII of the Constitution of India i.e. Union List, State List and Concurrent List. The Central government can legislate upon the subjects in the Union list, the State Government can legislate on the subjects in the state list and both Central and state government can legislate on the subjects of the concurrent list, but in case of contradiction, the law legislated by the Central Government will prevail. Equalization levy is being questioned on two fronts i.e. the incorporation through Finance Act, rather than Income Tax Act and the potential encroachment of the powers of the State government by the central government. The first issue has been dealt with in the earlier section. Entry 97 of List I covers “any other matter not enumerated in List II or List III including any tax not mentioned in either of those lists”. Thus, the fact that “Equalization levy” or “tax on advertising” is not mentioned in the List II or List II can be the basis for the Centre to legislate on this subject matter. But, the Entry 55 of List II covers “Taxes on advertisements other than advertisements published in newspapers and advertisements broadcast by the radio or television”. [The Indian Equalisation Levy: Inelegant but not Unexpected, Shreya Rao, NLS Business Law Review, 2016]
In order to resolve this deadlock, it is pertinent to understand the purpose of equalization levy. The primary purpose of equalization levy is to tax transactions on online mode. This includes multiple transactions, such as supply of goods, provision of services, advertising, marketing, promotional services and payment for reserving space on online medium for advertising. “Advertisement (other than through newspaper, radio or television)” is not the essence of the targeted transactions. It happens to be one of the subject matters on which the Centre legislated ancillary. It cannot be challenged on the basis of the pith and substance doctrine as the pith and substance of the area of legislation is within the powers of the Central government and the incidental encroachment upon the subject matter of the state cannot be a ground for declaring the legislation unconstitutional.
- Potential challenge under National Treatment on Internal taxation and Regulation under GATT: The exclusion of domestic e-commerce operators from the definition can trigger the problem of national treatment i.e. if a tax is implemented only on foreign e-commerce operators. It can be argued that the services provided by domestic e-commerce operators are taxed separately from the services provided by the foreign e-commerce operators. This principle is applicable exclusively in case of the imports and thus, if any products are supplied by the e-commerce operator (non-resident) to Indian residents, are taxed by equalization levy and same products supplied by domestic e-commerce operator are not subject to it, the national treatment principle under GATT can be violated and this action can be challenged at WTO. In order to avoid this, India will have to incorporate the provision, creating an exception in all its Double Taxation Avoidance Agreements. Alternatively, if significant economic presence and equalization levy are proposed and accepted by the nations in the next negotiation on BEPS Action Plan 1, it can be a possible safeguard for India. [Article III, General Agreement on Tariffs and Trade, 1947]
- Treaty Override: Since, Equalisation levy is not accepted to be a part of the Double Taxation Avoidance agreements or the Multilateral Instrument, it is difficult to implement it against various nations. The nations are unlikely to agree to equalization levy or even if they do, it might be a long and tedious process. Hence, it is safe to say that it can be implemented against various nations only if it is a part of the domestic law. Thus, the potential solution was to implement it through domestic law, it is accepted by all the nations and becomes a part of the DTAAs and the international law. An exception can be created to the DTAAs, only if the domestic tax is a tax on income. Thus, India’s approach to not to include the equalization levy as ‘income tax’ but ‘transaction tax’ can be perceived as a potential means of treaty override.
- Applicability of Equalisation Levy in certain cases: Clarification is required in terms of applicability of equalization levy in certain cases as the law is silent on that. For example, the applicability of equalization levy is unclear if the total transaction amount satisfies the threshold, but the discounted sale price is below the threshold value or when the products supplied by the non-resident e-commerce operator are returned by the customer and the equalization levy is already paid, the provision for rebate of the equalization levy is absent from the legislation. Thus, clarificatory provisions should be released by the CBDT in this regard