India: Income Tax

The Not-So-Great Equaliser Tax


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Days before the nationwide lockdown was announced, as part of the passage of the Finance Act 2020, Parliament proposed an ‘equalisation levy’ on overseas ecommerce operators.

This could not have come at a more inappropriate time. Besides ambiguities in the law, the measure comes without stakeholder consultation and assessment of its impact on startups and small businesses. More importantly, it has erred in analysing the economic impact on the sector, which has immense potential for FDI and trade negotiations with India’s largest trading partner, the US, and the ongoing deliberations at the OECD, which under the inclusive framework with over 100 nations, is attempting to build a consensus on taxation of digitised business models.

The equalisation levy, at 6%, was first introduced in 2016 and imposed on the revenues generated on B2B (business-to-business) digital advertisements and allied services of the resident service provider. It was purportedly introduced after a committee report stated the need to create a level-playing field by collecting taxes from non-resident companies that do not have a permanent establishment in India. In the Finance Act 2020, the equalisation levy’s scope has been expanded to include ecommerce players and intermediaries.

According to Section 165A of the Income-Tax (I-T) Act, an ecommerce operator is liable to pay tax at the rate of 2% on the amount of consideration received by it from ‘ecommerce supply or services’ made, provided or facilitated to both residents and non-residents. The provision needs clarity on various counts. The definition could encompass businesses that sell goods and services to Indian resident customers over the internet, such as retailers, manufacturers, banking or insurance companies, payment processing and payment facilitation companies, etc.

By its very nature, a one-size-fitsall template cannot be implemented for the internet business. The new tax has also failed to take into account that companies could be imposed this levy twice. A company may be venturing into ecommerce while simultaneously displaying advertisements. These companies have to pay a 2% levy, in addition to the 6% they were already paying. It has also been left ambiguous whether the exclusion is applicable for the whole business, or only those parts for which advertisements are shown.

Additionally, the short time-frame provided to companies to comply with the new law that came into force on April 1 requires them to change the reporting systems at a time when these companies are working at limited capacity due to Covid-19 lockdown. Besides comprehensive stakeholder consultation, an impact assessment would have been a logical measure to pursue before such a tax policy measure.

Even though the levy is on nonresident companies, given that Indian SMEs often use international ecommerce platforms and rely on services for backend operations to reach customers within India, its burden may fall on them. This will impact the cost competitiveness of startups, and small businesses, already under slowdown and lockdown strain, may succumb to the burden of added costs.

(Rizvi is a public policy entrepreneur, and Butani is partner, BMR Legal)


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