Scope Of Equalisation Levy Has The Tax World Divided
Rarely do newspaper editorials influence legal opinions. Their impact on tax policy is even more limited. But when the finance minister takes note of an opinion in a business daily, stakeholders sit up and take notice.
In the last few months, this story has played out vis-à-vis India’s digital tax, technically referred to as equalisation levy.
This tax is applicable to foreign e-commerce operators, with an annual turnover or sales of over Rs 2 crore, who don’t have a business presence in India. It’s applicable at the rate of 2% on sale of goods as well as services that take place through foreign-owned e-commerce entities.
But in a recent op-ed, Senior Advocate Arvind Datar wrote that it’s incorrect to say that import of physical goods or provision of physical services will be subject to equalisation levy. Explaining his view, Datar told BloombergQuint that this levy is applicable only to the supply of digital goods and services.
When equalisation levy was introduced, the whole idea was to tax digital goods. Suppose you earlier bought the Windows software in a box. It would be subject to customs duty and VAT. But now if I download that software, there’s no excise duty or sales tax. And that’s what this levy tries to remedy.Arvind Datar, Senior Advocate
Datar’s view caught Finance Minister Nirmala Sitharaman’s attention who quoted from his article on March 31.
Twitter To The Rescue
The Sitharaman - Datar Twitter agreement has helped clarify the scope of equalisation levy. Well, almost.
Confusion had ensued after the explanation in Finance Bill, 2021, alluded to by the finance minister, said e-commerce supply or service will be subject to equalisation levy when any of the following activities take place online:
Acceptance of the offer for sale.
Placing the purchase order.
Acceptance of the purchase order.
Payment of consideration.
Supply of goods or provision of services, partly or wholly.
At the time, the general understanding came to be that equalisation levy would be applicable to brick-and-mortar firm businesses that have an e-commerce model, pure e-commerce model, marketplace model and an intermediary as well. In simple terms, the levy would be imposed on transactions ranging from the online purchase of a software service (intended) to even the online booking of a hotel room in a foreign country (unintended?)
But now, after the finance minister's tweet, some experts are taking a narrower view on the scope of this levy.
One of the interpretations possible is that services contracted for online but provided offline or goods that are not delivered digitally cannot be subject to this levy, Rohinton Sidhwa, partner at Deloitte India, said.
Sidhwa pointed to the objective of equalisation levy as stated by the 2016 expert committee to impose it on specified digital services and goods.
Now, this is an important differentiation, since it could imply that physical goods contracted for digitally can therefore not be subject to the levy.Rohinton Sidhwa, Partner, Deloitte India
The 2016 committee report had recommended this levy for cloud computing, website designing hosting and maintenance, digital space, digital platforms for sale of goods and services and online use or download of software and applications.
The intent of the law is clear right from the start, Datar pointed out.
Physical goods are suffering conventional taxes like customs, anti-dumping or excise. Equalisation levy was always intended for digital goods.Arvind Datar, Senior Advocate
Sidhwa illustrated certain transactions for which the opinion has changed.
If a resident is booking a hotel room outside India on a foreign e-commerce site, the earlier anguish was that the levy would come into play on the value of the room - the offline service - and the e-commerce facilitation fee. But now, many are taking the position that offline services i.e. room charges are not subject to the levy. 'Only the e-commerce facilitation fee perhaps may be taxable'.
As with all things tax, not everyone agrees.
On most of these issues, it comes down to the taxpayer's risk appetite. Some giants are aggressive and some conservative, Mukesh Butani, managing partner at BMR Legal, said.
The recent change in views could perhaps be attributed to an (informal) diplomacy understanding that India would unlikely enforce it strictly until a clearer path emerges on taxation of digital economy which would eventually decide the fate of such unilateral levies. Perhaps why the U.S Trade Representative office suspended any retaliatory trade action against India for introducing a unilateral digital tax.Mukesh Butani, Managing Partner, BMR legal
The digital tax issue has assumed political dimensions due to sharing of taxing rights by nations, Butani added.
"If I import something merely using a digital platform, given a strict reading of the law, equalisation levy will be applicable. But if you ask me, was that the intent of the law? Then I’ll give you a different answer."