Equalisation levy: ESS EQL may require financial services players to relook at their commercial arrangements

In 2016, India introduced equalisation levy (EQL) to tax India-sourced income earned by a non-resident (NR) from online advertisements through digital means.

By Hasina Chhil

With models of e-businesses evolving at a rapid pace, the taxation around the same has become a huge debate between countries. The G20 recognised this as a major issue requiring guidance around how countries should tax such e-businesses. The OECD, nominated by the G20, has put in a lot of efforts to develop a globally-acceptable tax model; the same is being debated across member nations.

In 2016, India introduced equalisation levy (EQL) to tax India-sourced income earned by a non-resident (NR) from online advertisements through digital means. The objective was to cover entities earning advertisement revenue from India through digital means, but not being subject to tax in India. Since its introduction, the government of India has seen EQL’s contribution to the Indian exchequer increasing.

In the course of the enactment of the India Budget 2020, the government expanded the scope of EQL with effect from April 1, 2020, to cover within its ambit the e-commerce supply or services (ESS) provided by an e-commerce operator (EOP). The same was a unilateral move by the government; while the OECD is yet to conclude its discussions.

EOP is defined as any NR (as per Indian tax laws, or ITL) who owns, operates or manages digital or e-commerce facility/platform for the online sale of goods or online provision of services. ESS made or provided or facilitated by EOP to a person, inter alia, (1) resident in India or (2) using internet protocol address located in India shall be subject to ESS EQL where the sales, turnover or gross receipts in a year exceeds Rs 2 crore. The consideration received shall be taxable at 2%.

One would like to believe that ESS EQL shall apply to instances of e-commerce platforms situated outside India or online sale of software and the like, and the financial services (FS) industry should be outside the purview of ESS EQL, as they are not EOP. However, given the language of the regulation and in the absence of any specific exclusion for the FS industry, the same is not free from doubt. This can be illustrated below:

—Indian company (ICo) has sold goods to a customer in the US through an e-commerce platform in the US. ICo has tied up with a money exchanger in the US to collect and remit the funds to ICo for a commission/fee.

—ICo makes payment to X Inc (merchant) through a payment gateway (a NR entity), which charges network fees for the payments transmitted through its platform.

While prior to April 1, 2020, the aforesaid commission/fee was not subject to tax in India, as NR did not have any presence in India, pursuant to ESS EQL the consideration received by NR may now be subject to tax at 2%.
Similarly, instances such as payments to NR group entities where benefits under ‘make available’ of the treaty is applicable and sought to be availed, receipt of interbank settlement charges by foreign banks, brokerage received by intermediaries, etc, may also get covered within the scope of ESS EQL. The onus of determination of the liability and discharge of ESS EQL is on NR, and NR is required to obtain a tax ID in India and adhere to compliances, the failure of which results in levy of interest and penalty.

EQL is not administered under ITL but is governed by a separate legislation; accordingly, the availability of treaty protection and foreign tax credit in the home jurisdiction for NR is also likely to be a challenge.

While the objective of the government in expanding the scope of EQL was to cover supply of goods or services provided by NR, the financial services industry, too, has been covered within the ambit of ESS EQL.

Now, ESS EQL may require the financial services players to relook at their commercial arrangements and this may, inter alia, involve passing on transaction costs to customers in India. Countries like the UK, France and Spain have amended their digital tax laws to exclude the financial services industry. A clarification on similar lines from the Indian government will be welcomed by the financial services industry in India.

(Jugal Kajaria, tax director, EY, contributed to this article.)

The author is tax partner, EY India. Views are personal

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