VIEW: Govt must clarify on nuances of Equalisation Levy 2.0 to avoid litigation

India’s first tryst with equalisation levy (‘EL’) was in the year 2016, when an attempt was made to bring non-resident advertising platforms generating revenues from Indian audiences, under the Indian tax net. Equalisation Levy 2.0 (introduced in Budget 2020 and effective from April 1, 2020), living up to its name in the most literal sense, has taken all involved by an ‘equal’ element of surprise. EL 2.0 applies to non-resident e-commerce operators (‘EOP’) with digital or e-commerce facility or platform for the online sale of goods and/or online provision of services.

The levy imposes a rate of 2 percent on the ‘consideration’ received/receivable by the EOP. The first due date to deposit EL 2.0 was July 7, 2020, and various stakeholders had requested for clarifications to iron out the creases, and deferment to absorb the new levy amidst the ongoing pandemic crisis.

The government on July 4 amended the existing tax payment challan (ITNS 285) to facilitate payment of EL 2.0. This makes it clear that there is not going to be any deferment of EL 2.0. Similar to other countries levying digital taxes, EL 2.0 was India’s response to get non-residents who generate substantial revenues from India, without any physical presence in India but through the ever-expanding digital world, to pay tax in India. Nevertheless, it was expected that all countries should reach a consensus first and then introduce a consistent levy. However, the current trend of various countries taking unilateral action can create inconsistent tax treatment across geographies.

A key question in EL 2.0 is whether contracts merely concluded over emails/website come under the purview of ‘online’ or ‘digital’ sale. Also, it is often observed that the e-commerce portals include within their fold, direct sales as well as instances of acting as a mere facilitator/aggregator. Illustratively, Mr. A (Indian resident) purchases retail software from a US website for $300, the US company is required to pay $6 as EL 2.0 in India.

In the same example, if the said e-commerce company uses a US third party platform to sell this software and pays 1 percent commission to the third-party platform on each sale, whether EL 2.0 would be applicable on $300 or $3? This will be a live issue with platforms/aggregators offering third party products/services. Also, clarifications regarding credit/refund on account of cancellations are needed.

Further, with effect from April 1, 2021, all services covered within EL 2.0 will be exempted from Indian income-tax. Would this mean that e-commerce services that are currently taxable at 10 percent as ‘fees from technical services’, will now be taxed only at 2 percent? And whether both the levies would co-exist for the financial year 2020-21 (since EL 2.0 is effective from April 1, 2020, and the exemption from income-tax is effective only from April 1, 2021)?

In view of these inconsistencies, it is imperative that the government clarifies these nuances at the earliest so that EL 2.0 doesn’t become a litigious nightmare.

Permanent Account Number (‘PAN’) is a mandatory field for payment of EL 2.0, and since EOPs are non-residents, most of them are not likely to have a PAN. Applying and obtaining a PAN within two working days for non-residents, in these lockdown times with a reduced workforce, could be a challenge. Also, the limited timeframe within which EL 2.0 took effect, hasn’t given enough time to the EOPs to put appropriate systems in place and identify the impacted transactions.

Non-deposit of EL 2.0 by the due date attracts simple interest at the rate of 1 percent per month and penalty equivalent to the amount of EL. While interest is a mandatory charge, levy of penalty is at the discretion of the tax authority, waiver of which is possible on account of the aforesaid practical difficulties subject to the satisfaction of the tax authorities.

To address the questions/concerns of EOPs, it is widely expected that the government will soon issue appropriate clarifications and may waive penalty arising due to unintended delay in depositing the first leg of EL 2.0. Conversely, it is recommended that the EOPs who do not have any ambiguity on the applicability of EL 2.0 on their services, should apply for a PAN and make the payment on the undisputed consideration at the earliest possible.