Experts say levy will cause compliance problems for taxpayers, having come so late.
Companies will have to do a lot of adjustments in their own systems while trying to comply with this newly clarified
The government offered some relief on its contentious proposals on equalisation levy, through an amendment in the finance Bill, 2021. However, this did not satisfy industry.
While the levy applied only to digital advertising services till March 2020 at the rate of six per cent, the government widened the scope to impose two per cent tax on non-resident e-commerce players with a turnover of Rs two crore from April 1, 2020.
In fact, the Finance Bill, 2021 sought to further expanded the scope of the two per cent equalisation levy by way of clarifications to e-commerce supplies or services when any activity, including acceptance of the offer for sale, placing the purchase order, acceptance of the purchase order, supply of goods or provision of services, partly or wholly payment of consideration, takes place online.
Besides, the levy would apply on gross consideration and not just the commission earned, leading to an outcry from industry.
These will apply retrospectively from April 1, 2020. The government has however, said that these are only clarificatory in nature and these transactions were always intended to come under the purview of EL.
However, at the later stage of passage of the finance Bill, finance minister Nirmala Sitharaman moved an amendment to the legislation to address the concerns over the expansion of equalisation levy.
According to amendments, cleared by Parliament, digital tax, aimed at foreign e-commerce operators, will not now apply to goods or services owned and operated by Indians and transacted over an overseas e-commerce platform. This means that if goods or services listed on a foreign marketplace are owned or provided by an Indian resident or Indian permanent establishment (PE) of a foreign entity, they will be out of the purview of the 2 per cent equalisation levy.
“…equalisation levy would treat everybody who is operating in India equally. So, if foreign ecommerce companies pay income tax in India, equalisation levy is not applicable to them. Hence, there is no extra burden on any company,” Sitharaman said.
But, this is only a partial relief and even this could be litigated.
This is so because establishing that the supplier has a PE in India itself is a matter of litigation, Divakar Vijayasarathy, founder and managing partner DVS Advisors, said.
The amendment could not clear the air over various queries by industry. For instance it did not clarify whether EL would be imposed on offline transactions or not or whether it would be imposed on gross value of goods and services or the margins of operators.
The Bill, tabled in Parliament at the time of Budget, says scope of the terms “online sale of goods” and “online provision of services” will cover any of the following activities if undertaken online: acceptance of an offer for sale, placing a purchase order, acceptance of a purchase order, payment of the consideration, the supply of goods or provision of services, partly or wholly.
A note by EY said this proposed amendment may broaden the applicability of EL provisions even to physical, offline supplies of goods and services if any one of the above activities has taken place online.
Said Akhilesh Ranjan, former member of the Central Board of Direct Taxes, the levy will cause compliance problems for taxpayers having come at this late stage. Companies will have to do a lot of adjustments in their own systems and try and comply with this with this newly clarified law, he said.
"I still have not been able to understand why the government did not come out with clarifications last year as this levy was so broad or so wide in scope when it came all of a sudden in 2020. At the time of the passing of the finance Bill there was no debate and there was no discussion in the public domain on the scope of this levy and then it came all of a sudden in the end of march being effective from the first of April," he said.
He said the levy really called for a number of clarifications so as to clarify the scope, clarify the intent, clarify how it is to be computed. "...there are a whole lot of questions out there," he said.
In fact, by not issuing frequently asked questions (FAQs) or clarifications the government did a disservice to itself because then people started making their own interpretations and obviously those interpretations would be directed at trying to see how best they can come out to the scope of the levy.
Amit Maheshwari, tax partner at AKM Global, said even after amendments it was clear if the levy would cover inter-company transactions.
"Further, the levy on gross consideration is an indirect way of taxing the income of the third party sellers which is quite burdensome to the marketplace," he said.
Imposing EL on gross value of goods and services arises from clarification in the Bill which says this would include goods or services, whether or not owned by the operator.
While the department of revenue would insist EL on the gross consideration, operators would argue that the levy should only be on their margins, Vijayasarathy said.
Also, there is no clarity in terms of transaction between two non-residents for sale of data, Maheshwari said.
While the definition of "specified circumstances" uses the term "sale of data", it is not clarified what kind of data will attract the levy, he said.
There are other issues such as whether or not financial services or not-for-profit activities will attract EL, he said.
Also, there is no option for a non-resident to obtain an advance ruling on the applicability of the EL provisions, Maheshwari said.
Vijayasarathy said the explanations inserted by the Finance Act, 2021 in an attempt to clarify the provisions of EL have given rise to more questions and litigation seems inevitable.
Explanations clarified that the incomes charged to tax as fee for technical services and royalty would not be subject to tax.
"This is welcome but the subject matter of royalty itself is prone to litigation as was evident in the high profile judgement of the Supreme Court," he said.
The Supreme Court has ruled in favour of companies by rejecting the income tax (I-T) department’s stand that the money paid by Indian companies for use of software developed by foreign firms amounts to royalty and is taxable in the country.
With royalty being charged under a higher tax rate than EL, the department of revenue would be inclined to classify the income as royalty, Vijayasarathy said.
"Overall the ambiguity surrounding EL is not expected to settle anytime soon," he said.
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click here to read the full story published in Business Standard on March 31, 2021.