Equalisation levy should stay, but clarity is needed on some grey areas
The vociferous criticism of the changes proposed to the equalisation levy in the Budget highlights the extent to which foreign e-commerce players are averse to it. The levy hamstrings their ability to avoid paying taxes in countries from where they derive their revenue. It is notable that India was among the first to implement the levy, which was initially proposed by OECD to prevent base-erosion caused by multinational digital services companies; there is no reason for the Centre to dilute the levy or restrict its scope. Many other countries are also in the midst of similar battles to establish their sovereign right to tax such digital transactions. However, the rules should be unambiguous to avoid needless litigation and arbitration. The Budget attempted to clear the air over some provisions regarding the equalisation levy, but there are still some grey areas.
Last year, the Centre expanded the ambit of the levy to include all non-resident e-commerce players with an annual turnover of ₹2 crore or more. It is not surprising that the foreign e-commerce players initially refused to pay the levy and lobbied with the USTR. While the USTR in its January report has found the levy discriminatory, the Centre has rightly decided to ignore the report. In fact, the Budget for 2021-22, while clearing the air over certain aspects, has expanded the scope of the levy. It has laid down that non-resident e-commerce companies, which are receiving a royalty or Fee for Technical Services, are required to pay the tax at the rate of 10 per cent and not the equalisation levy at 2 per cent. This clarification will ensure that companies that were interpreting the law to their benefit to pay the lower equalisation levy rate, can no longer do so. Many players had complained that the taxable value of goods and services was not clearly defined. The Budget has clarified that e-commerce marketplaces will have to pay the levy on the sale value of goods and services, and not on the commission earned alone.
The explanation regarding what constitutes taxable e-commerce supplies has, however, created some confusion. The authorities may need to issue a clarification. The Budget says that e-commerce supply or service shall include online acceptance of offer for sale and placing and acceptance of a purchase order online. This seems to suggest that if the payment for an offline supply of goods or services is made online, such supplies may come under the equalisation levy. Similarly, bringing digital payment of consideration under the ambit of the levy could result in double taxation of offline supplies. Companies that only facilitate online payments of goods or supplies of other companies will also become liable to pay this levy. Clarifications on these counts will help in smooth enforcement of the equalisation levy.