Decoding the maze of equalisation levy

Vidushi Gupta | Updated on March 30, 2021

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Expanding the scope of this tax in last year’s Budget has made it more complex and burdensome

India first introduced an equalisation levy in 2016, when it charged 6 per cent of consideration for online advertisement services, earned by non-residents from an Indian resident carrying on business.

The 2020 Budget substantially extended the scope of the equalisation levy. Besides taxing online advertisement services, it was also levied on the consideration received by e-commerce operators crossing the prescribed threshold, for supplies to Indian residents, persons using an Indian IP address, and non-residents in certain cases.

To combat the Covid pandemic, the Centre perhaps found it useful to tap digital businesses for garnering additional tax revenues, as they were less affected by the crisis.

The equalisation levy, when it was first introduced, led to double taxation and further complicated the taxation framework. It also raised questions of constitutional validity and compliance with international obligations. Despite its imperfections, the levy as it stood prior to 2020 collected revenue and possibly played a role in propelling international discussions on the issue. However, the 2020 amendment led the levy to be inexplicably wide and vague in its scope. The fact that the amendments were never a part of the government’s Budget presentation and were introduced without consultation impacted investor sentiments.

The digital economy played a key role in sustaining the economy in 2020 and is likely to do so going ahead. Therefore, to sustain the sector’s growth the primary expectation was rationalisation of the equalisation levy.

However, Budget 2021 ended up substantially increasing the scope of the levy from April 2020. First, they ‘clarified’ that ‘e-commerce supply or services’ include a plethora of online activities. ‘Online sale of goods and provision of services’ that qualify an organisation as an e-commerce operator was proposed to include the following activities undertaken online — acceptance of offer for sale, placing of purchase order, acceptance of purchase order, payment of consideration and supply of goods or provision of services, partly or wholly.

The scope of the tax base, that is, ‘consideration received from e-commerce supply or services’, now also included consideration for sale of goods and services irrespective of whether the e-commerce operator owns the goods, or provides the services.

This proposal created more issues than it clarified.

Expanding the ambit

First, it brought an array of businesses within its ambit. The equalisation levy can potentially be levied on payment portals; takeaway sales; and other predominantly off-line businesses that require physical presence but allow online booking like travel, theatre experiences, or hotel stays.

Second, e-commerce operators are to calculate equalization levy as a percentage of the entire consideration for supply collected by them, as opposed to the commission accruing to them. Based on the vague wording of the Finance Bill, it could also be argued that the levy would apply even where e-commerce operators do not charge a commission.

When the Finance Bill, 2021 was placed before Parliament, a further ‘Notice of Amendments’ was introduced. While most of the provisions of the Bill were confirmed, certain alterations were made to the scope of ‘consideration’.

The Finance Bill had initially included consideration for sale of goods and services irrespective of whether the e-commerce operator owns the goods, or provides the service. While maintaining this inclusion, the Finance Act provided a carve out to exclude consideration received for sale of goods or provision of services sold or provided by an Indian income taxpayer.

This exclusion seems to provide respite by excluding goods sold by, and services provided by Indian taxpayers through foreign e-commerce operators from the ambit of equalization levy. However, it bizarrely incentivises foreign e-commerce operators to increase their commission on goods sold and services provided by Indian taxpayers.

It also complicates the regime by on one hand exponentially widening the tax base, and on the other allowing exclusions. This amendment also does not address the apprehensions caused by the changes first proposed through the Finance Bill. This includes the coverage of e-commerce operators that only make offline businesses accessible digitally, and those that do not charge commission.

Moreover, Finance Act, 2021 introduces all amendments to the scheme as ‘clarifications’ applicable since April 2020, which could be in violation of the Constitution. Foreign investors typically frown at such amendments.

Lastly, the additional compliance burden increases platforms’ costs, which are eventually recovered from customers. The levy is thus distortionary and detrimental to consumers already distressed due to the pandemic.

The equalisation levy was conceptualised as an interim measure to collect revenues and drive global negotiations. It was always acknowledged as an unsustainable levy complicating the taxation framework. Policymakers initially viewed this complication as a fair trade-off for short-term revenue gains.

However, the maintenance of a simple, targeted regime with minimal distortions and low administration and compliance cost was a fundamental factor for this cost-benefit analysis. The levy as it stands today does not have any of these key features. Moreover, with the recent change in the US administration, global negotiations have seen advancements. Against this backdrop, there is no justification for continuing to impose a burdensome, imperfect, disproportionate, and potentially illegal equalisation levy.

The writer is a tax law and policy expert

Published on March 30, 2021

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