The Indian legislature introduced a new 2% equalisation levy (“2% EL”) in the Finance Act, 2020. This came as a bolt from the blue for many since the 2% EL was not a part of the budget proposals or part of the Finance Bill, 2020.
The 2% EL is levied on foreign e-commerce operators, who own, operate or manage a digital facility or platform for selling or facilitating sales of goods and services online to Indian residents [or persons using an Indian internet protocol (IP) address]. In some cases, EL also applies to consideration received from non-residents on (a) sale of advertisement targeting Indian residents or persons using an Indian IP address; and (b) sale of data collected from Indian residents or customers using an Indian IP address.
The intent of the levy is clear – to tax non-resident e-commerce players who often escaped taxation in India even though a major chunk of their business and profitability was derived from Indian users.
However, a lot of hue and cry has been made by the e-commerce industry – to the point where the US government has initiated section 301 investigations on the digital services taxes introduced by several countries including India, on the allegation that such levy target large US companies.
In between the power tussle, one cannot shy away from the ambiguities that exist in the new levy, rendering its implementation impracticable for now. There is lack of clarity on the tax base, the meaning of the expression ‘digital facility or platform’, scope of the expression ‘facilitation’, interplay of new EL with income tax provisions, etc. The policy process that typically precedes any major tax reform in India was conspicuously absent before introducing the 2% EL which may affect taxpayers’ confidence in India’s fiscal system and the digital economy adversely.
The first due date for depositing the 2% EL has already elapsed on July 07, 2020. However, the government didn’t afford any time to foreign e-commerce operators to prepare for the administrative burdens of implementing new systems to comply with the EL related compliances amidst the COVID-19 situation. An advance notice to foreign e-commerce operators in this regard was warranted for them to mobilize additional cost and resources to capture India-centric data and develop new tax and audit procedures.
Moreover, the tax challan for depositing taxes mandates the non-resident e-commerce operators to quote PAN. The mandatory requirement of quoting PAN has no basis in any statutory rules and only emanates from the challan. Having the necessary statutory framework in place, requiring obtaining of PAN is necessary and needs clarity. Additionally, obtaining PAN for a non-resident is a time consuming process, since charter documents forming part of PAN application are required to be apostilled or notarized by the respective overseas Indian embassies. The modified format of the payment challan was released only on July 3, 2020 which left no time for the foreign e-commerce operators to obtain PAN. The entire process seems improbable within the stipulated timeline, and the pandemic situation does not help one bit.
In light of the above mentioned administrative difficulties coupled with the ambiguity in the legislation itself, there seems to be a compelling case for its deferral and for condoning any interest or penalty that may be chargeable for missing the July 07, 2020 deadline.
Contributed by: Amit Singhania, Partner; Nimish Malpani, Associate
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