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Equalisation Levy – The E-commerce Leveler

The amended Finance Bill 2020 proposes to expand the scope of the equalisation levy from non-resident companies providing online advertisement facilities (Specified Services) to ‘e-commerce operators’ at the rate of 2%. This levy will be effective from April 1, 2020.

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E-Commerce has transformed the business models the world over. India is no exception, the e-commerce industry in India expected to grow to US$ 200 billion by 2027, a significant rise from about 39 billion dollars in 2017. Current active E-commerce penetration in India stands at only 28 percent and India's retail e-commerce CAGR is projected to reach 23 percent from 2016 to 2021. 

Eager to take its piece of the pie, The Equalisation levy; a googly bowled by the Government of India to bring to the tax wicket, the income accruing to non-resident e-commerce companies from India. It is aimed at taxing b2b transactions. 

The amended Finance Bill 2020 proposes to expand the scope of the equalisation levy from non-resident companies providing online advertisement facilities (Specified Services) to ‘e-commerce operators’ at the rate of 2%. This levy will be effective from April 1, 2020.

For the purpose of this levy an “e-commerce operator” is defined as a non-resident who owns, operates or manages a digital or electronic facility or platform for online sale of goods or the online provision of services or any combination thereof. 

This levy of 2 per cent will be charged on the consideration received/ receivable by such e-commerce operators in respect of goods or services provided / facilitated by such e-commerce operator to:

  •  persons resident in India
  •  non-resident persons (in respect of sale of advertisements targeted at persons resident in India or using IP address in India)
  • persons who buys goods or services using an IP address located in India

However, the equalisation levy is not applicable when:

  • The non-resident has a permanent establishment in India and the e-commerce transactions for supply of goods or provision of services are effected from such permanent establishment
  • The gross receipts / turnover in respect of goods sold / services provided to residents, non-residents and persons using IP addresses located in India is less than Rs. 2 crores in a year
  • The equalisation levy at 6% on “specified services” (as referred to below) is applicable

The equalization levy was first introduced in 2016, as applicable primarily to digital advertising players at the rate of 6 percent on certain ‘specified services’, which covered online advertisement and any provision, facility or service for digital or online advertising. Unlike the equalisation levy in case of advertisement and related services where the resident payer was responsible to deduct and pay the same to the GoI, the compliance obligation in this case is to be discharged by the e-commerce operator (non-resident) on a quarterly basis and also file the annual return.

The levy forms part of India’s response to the OECD’s BEPS (Base Erosion and Profit Shifting) agenda. Even as the OECD countries under the BEPS Action plan I are still struggling to arrive at a consensus on how to tax the digital economy,  Indian tax authorities have  raked in  as much as INR 550 crore in FY17-18 and INR 887 crores till Jan 15 in  FY 19-20 * from digital platforms such as Google, Facebook and twitter. The levy would be applicable to eligible transactions between non resident e-commerce operators if they use Indian Data .This has ignited a global debate on valuing of user data, how such user data is collected, disseminated, collated and   analysed using AI/ ML for instance user preferences or browsing topics  are tracked on various social media platforms and then monetised through targeted advertising. India, has taken the initiative to collect tax on the value created by companies from User Data. Here the vital question arises where on one hand companies are striving to comply with EU General Data Protection Regulation (GDPR) should governments tax digital companies that monetise user data to shore up their own tax revenues? And, if so, what metrics should they use to value user data?

The COVID-19 disruptor has challenged the traditional brick and mortar format and demonstrated the resilience of highly digitalized business models in the wake of mitigation measures such as social distancing and work from home. We see a greater thrust towards digital formats. 

The increasing digitization of the world economy and the vast revenue potential it offers for the companies and the Sovereign,  for India the best way forward appears to be to tax the digital economy providing a level playing field to the brick and mortar businesses and their digital adversaries for foreign and domestic e-commerce operators and  tapping the vast revenue gold mine of the digital economy for its ounce of gold. 

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Ritika Agarwal

The author is Senior Director, Rajeshree Sabnavis & Associates

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Monisha Patel

The author is Senior Consultant, Rajeshree Sabnavis & Associates

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