India has been a frontrunner in amending its laws to tax foreign digital businesses. India has rallied up most of the OECD interim measures on taxing the digital economy, pending global consensus – be it the significant economic presence test or a 6% equalization levy (“EL”) on online ad revenues. In the same spirit, the Government made a surprise introduction of a 2% EL on foreign e-commerce operators vide the Finance Act, 2020.
The new EL taxes the consideration received by an ‘e-commerce operator’, being a foreign enterprise, which owns, operates or manages a digital facility for selling or facilitating sales of goods and services online to Indian residents. The new EL also covers consideration received from non-residents involving sale of advertisement targeting Indian residents or sale of date collected from Indian residents. The foreign e-commerce operator is responsible to deposit the 2% EL and undertake related compliances.
Although the new EL has come into effect from April 1, 2020, a bunch of issues surrounding such levy are unresolved.
First, the tax base of the new EL is unclear. In case of an online marketplace, will the levy apply to gross merchandise value (GMV) or the commission retained by such marketplaces? Given that, EL is a substitute for income tax on the marketplace, the tax base should be restricted to the commission. However, the language of the section is ambiguous.
Second, while EL is effective from April 1, 2020, the income tax exemption applicable to transactions subject to new EL will only take effect from April 1, 2021. The rationale for this time lag is not clear.
Third, what would qualify as facilitation of an e-commerce supply to trigger the new EL? Would listing of products be facilitation even if the transaction is concluded outside of the e-commerce operator’s facility? No EL should apply where the operator receives no consideration for such facilitation
Finally, There is also no clarity on whether B2B transactions such as online order of goods placed by an Indian affiliate on the foreign manufacturer for onward sales in India or whether financial services such as online loan, payments processing etc. would also fall under the net of the new EL.
Indeed, the policy case for the new EL merited stakeholder consultation and debate given its broad-based ramifications on India’s digital economy. However, even otherwise, several interpretational issues exist surrounding the new EL, which ought to be ironed out prior to its implementation for certainty. Thereby, making out a strong case for the deferral of new EL.
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