By Hitesh D Gajaria
India amended its Finance Bill on Monday in Parliament, enlarging the scope of taxing digital companies. This amendment has taken everyone by surprise, as it was not part of the provisions of the Finance Bill 2020 when it was introduced in Parliament by finance minister Nirmala Sitharaman on February 1.
GoI probably wants to enhance tax collections immediately via this route on account of the Covid-19 crisis and the economic devastation that it has already started to wreak. Worries about the burden of these measures not actually falling on non-resident companies, but on residents of India who have embraced the digital economy, are real.
This burden is likely to be in the form of higher prices of goods and services procured online. Even if this were to happen, these measures may not be all that harsh and could fall on that constituency of residents who have the capacity to bear this price hike.
An ‘equalisation levy’ was introduced by the Finance Act 2016 on certain non-resident businesses. This applied at the rate of 6% on certain ‘specified services’, which covered online advertisement and any provision, facility or service for digital or online advertising. India residents were obliged to deduct the equalisation levy on payments for such specified services and pay GoI.
The amended Finance Bill 2020 proposes to expand the scope of the equalisation levy from non-resident companies providing online advertisement facilities to ‘ecommerce operators’ at the rate of 2%. This levy comes into force on April 1.
An ‘ecommerce operator’ is defined as a nonresident who owns, operates or manages a digital or electronic facility or platform for online sale of goods, or online provision of services. The ‘ecommerce supply or services’ on which the levy will now apply are online sale of goods owned, or online provision of services, by the ecommerce operator; online sale or provision of goods facilitated by the ecommerce operator (i.e., where she provides a platform for others to supply goods or provide services), or any combination of the above.
The levy is applicable when the goods or services are provided or facilitated by the ecommerce operator to a resident of India, a non-resident (in respect of sale of ads targeted at residents of India, or persons using an IP (internet protocol) address in India); and a person who buys goods or services using an IP address located in India.
Certain situations where this levy is not applicable include the nonresident having a permanent establishment in India and the ecommerce supply or services being effectively connected to such a permanent establishment; where the equalisation levy at 6% on ‘specified services’ applies; and where the gross receipts or turnover in respect of goods sold or services provided to residents, non-residents and persons using IP addresses in India is less than `2 crore a year.
Unlike the equalisation levy on specified services where the resident payer has been responsible to deduct and pay the levy, this updated levy on ecommerce operators is to be discharged by the operator itself on a quarterly basis. Consequently, an exemption from income tax (I-T) is proposed in the hands of ecommerce operators in respect of amounts covered by this levy.
As in the case of the equalisation levy, however, this updated levy is not part of the I-T Act, and is intended to be outside the purview of India’s tax treaties. This move is consistent with the ‘digital tax’ in many other countries. In the onslaught of the Covid-19 crisis, highly digitalised business models have generally been less affected than traditional ‘brick-and mortar’ businesses. In fact, some are likely to fare better.
With tax revenues likely to plummet across the world, the pressure on governments to implement unilateral measures will only grow. Perhaps the multilateral approach in taxation is at risk. So, India needs to be watchful of possible retaliatory measures affected countries — home to digital giants — might take.
(The writer is partner and Co-Head of Tax, KPMG India.)