With the amplified role of technology in businesses, many companies no longer need a physical presence to conduct business in another jurisdiction. The current pandemic has further accelerated the rapid adoption of technology and altered consumer patterns. Tax law has hitherto been tailored towards collecting tax from businesses that have a brick and mortar presence in a jurisdiction.
The Indian government, in 2016, introduced a unilateral digital tadubbed the ‘equalisation levy’ whereby it aimed to tax the online advertisement revenue earned from India by non-residents that did not have a physical presence in India. However, the ambit of the equalisation levy was signiffcantly expanded by the Finance Act 2020 to cover non-resident e-commerce operators who own, operate or manage a digital/electronic facility or platform for online sale of goods or online provision of services or both. With effect from April 1, 2020, such non-resident e-commerce operators are subject to an equalisation levy of 2% of the amount of consideration received from the supply or services made/provided or facilitated by it to: (i) a person resident in India; or (ii) another non-resident, if:
That the levy also extends to transaction between non-residents, for example; the situation where non-resident purchases goods/ services using an Indian IP address has created a fair amount of controversy around ‘extra-territorial’ application of this law. Typically, a law made by the Parliament is not invalid merely because it has extra-territorial application unless there is no nexus with India. Thus, the government’s approach seems to be that the use of an IP address constitutes sufficient territorial nexus with India and thus it is justified in imposing the levy in such circumstances. Clearly, in such cases determining territorial nexus merely based on use of Indian IP address has been deemed harsh by many experts. Further, even in cases where there is a territorial nexus with India, for example; advertisement services “targeting Indian customers”, practical issues will arise on allocation of income, especially when such services are provided on global social media platforms.
Another challenge that is posed by the equalisation levy is that since the levy is not in the nature of income tax, the ability of a non-resident to claim relief under tax treaties or to claim credit in his home jurisdiction is hampered as the levy is not covered by the tax treaties entered into by India.
In the past few years, many countries such as France, Italy, UK, Spain, Canada, and Australia have either proposed or implemented a unilateral digital tax. The Organisation for Economic Co-operation and Development (OECD) has been working towards reaching a multilateral consensus-based solution to the tax challenges arising from the digitalisation of the economy by involving over 130 countries including US and India and it had aimed to achieve a consensus by December 2020. However, this date has been extended to mid-2021 owing to the pandemic. Given the delay and the economic challenges currently faced by countries, it is likely that many countries which were inclined to impose such unilateral taxes may go ahead with such an imposition.
Interestingly, the United States Trade Representatives (USTR) has initiated an investigation into digital tax levied by various countries including India to determine whether any act, policy, or practice of a foreign country is unreasonable or discriminatory, and burdens or restricts U.S. commerce. India has submitted its response defending its levy, stating the fact that it is not discriminatory as the levy applies to all foreign companies and is not aimed at US companies in particular. The submission also draws strength from an American case — South Dakota vs Wayfair Inc. — wherein the Supreme Court of the US held that physical presence is not required to levy sales tax by a state as long as there are buyers in the state. India has also submitted that it was fully consistent with World Trade Organization norms and international taxation agreements.
Taxation of the digital economy poses unique challenges. While one appreciates the need to ensure fair taxation of digital businesses, an attempt to unilaterally tax such businesses without there being a bilateral or multilateral consensus between nations is not necessarily the best way forward. In the absence of a consensus, the imposition of an equalisation levy may need a rethink by the government since it could have a detrimental impact on India’s trade relations with major economies and could also lead to retaliatory measures.
Contributed by: Abhay Sharma, Partner; Priyanka Jain, Senior Associate
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