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Indian equalisation Levy: What CFOs need to be mindful of?

The further extension in the scope of Equalisation Levy (EL) by the Union Budget via Finance Bill , 2021(FB) has posed significant challenges for companies in digital businesses. The way the laws are worded as of now throw several issues, which the CFOs need to be mindful of to ensure their compliances.

Equalisation Levy would also be applicable on services provided by the foreign parent company to its subsidiaries/affiliate entities in India, if the services are provided through digital means. A large number of MNCs could be providing IT support, online database access, in house portals to buy goods and other similar services and could be sharing the cost of accounting , payroll and other systems with group entities and all such services could very well now come into the ambit of Equalisation Levy.

Categorisation of payment as Royalty/Fees for Technical Services is all the more important now. One needs to be mindful that payments of such nature, if not covered under the Double Taxation Avoidance Agreement (‘DTAA’), could be subject to Equalisation Levy. Taxes covered under the DTAA are creditable unlike Equalisation Levy which are not and hence add to the tax cost.

It has now been clearly provided that conducting any one or more of the following activities would be considered as online provision of goods and services :

a) Acceptance of offer for sale

b) Placing of purchase order

c) Acceptance of purchase order

d) Payment of consideration

e) Supply or service, wholly or partly online.

Hence, even a single activity like acceptance of offer etc. can lead to the whole of the transaction being subject to Equation Levy. CFOs may have to seek changes in internal business processes to mitigate the risk of Equalisation Levy in such cases.

It has been clarified that the whole consideration for goods/services shall be subject to Equalisation Levy, even if the e-commerce operator is not the owner of goods/services. This would pose a challenge as the liability amount on account of Equalisation Levy could be very high. Companies would have to make the difficult decision on whether or not to pass on the entire cost to the customer. Since the clarification is applicable retrospectively from 1st April, 2020, the operator may have collected Equalisation Levy only on the commission amount for this period and this could pose a practical challenge as the Equalisation Levy cannot be collected retrospectively from customers. In a recent post budget meeting with industry, CBDT joint secretary, Kamlesh Varshney has agreed that Equalisation Levy should be on commission in such cases, but there is no official response.

Similarly, several clarifications which have been proposed by the Finance Bill are applicable retrospectively from 1stApril, 2020. Hence, the CFOs will have to revisit the positions adopted and calculations done earlier and will need to modify those accordingly. They will have to realign internal processes, take the CEO into confidence and try to cut down the risk arising on account of internal processes.

Besides, since the Equalisation Levy is a compliance for a foreign enterprise to get registered in India and charge and pay the same, the Indian businesses are kept insulated from this compliance burden. This does not include online advertising. However, this will now lead to increased cost in the hands of the Indian customer.

Equalisation Levy in its present form will pose several teething issues and CFOs would need to work in sync with several departments along with the Board of Directors to comply and cut down the risk of the unintended transactions being covered under it.

About the Author: Amit Maheshwari is Tax Partner, AKM Global.

DISCLAIMER: The views expressed are solely of the author and ETCFO.com does not necessarily subscribe to it. ETCFO.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.

Please click here to read the full story published in The Economic Times.

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