Taxation of the Digital Economy, India

Authors: Rajesh Tripathi, Principal, L.L.M., Market Leader, International Tax, U.S. India Corridor and Saira Fida, CPA

India's Digital Tax - what it means for the U.S. Tech Giants - Read this article for a high-level discussion to see if you are required to take action.

Is Your Business An E-commerce Business With Revenue In India?

If so, April 1, 2020 India enacted a 2% Equalisation Levy (EL), also referred to as the Digital Services Tax (DST). The 2% EL was an expansion to the EL that was introduced in 2016 under India’s Finance Act at 6% on certain online advertising space, any provision for digital advertising space and/or any other facility or service for the purpose of online advertisement. This 2% tax is applicable to a non-resident e-commerce operator from e-commerce supply or services that does not have a permanent establishment in India, the threshold for this levy is Rs. 2 crores (roughly $270,000 USD).

Who Is An E-commerce Operator?

An e-commerce operator for this purpose is broadly defined to mean a non-resident operator that is any combination of owning, operating, and/or managing a digital or electronic facility or platform that allows for the online sales of goods and/or the provision of services.

When is the Levy Applied?

The EL is applicable to an e-commerce operator whose customer is a resident of India or if the customer is using an IP address located in India.
The EL is applied to “e-commerce supply or service” which includes the sale of goods owned by the e-commerce operator, provision of services by the e-commerce operator, or the e-commerce operator facilitating the sale of goods or provision of services. The EL is also applicable to persons who buy goods or services or both using an IP address located in India.

Exclusions:

The EL is not applied:

• If the business is considered to have a Permanent Establishment in India.
• Where the payment falls under the definition of EL introduced in the Finance Act of 2016 for online advertisement.
• Sales, turnover or gross receipts of the e-commerce operator from e-commerce supply or services does not exceed more than Rs. 2 crores (roughly $270,000 USD) in a year.

U.S. Reaction:

The U.S. administration announced an initiation of an investigation under section 301 of the U.S. Trace Act (1974) against the DST. On June 5, 2020, the U.S. also announced investigations with respect to DSTs adopted or under consideration by Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom.

Why is the U.S. Raising the Concern?

The office of the United States Trade Representative (USTR) released a report on January 6, 2021 raising concerns that India’s DST is discriminatory against U.S. companies, contravenes prevailing international tax principles (and is therefore unreasonable), and that India’s DST burdens or restricts U.S. commerce.

India’s Response?

India issued a press release on January 7, 2021 stating the purpose of the EL is to ensure fair competition, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations.

India’s position in the press release is that absent this levy e-commerce operators without a Permanent Establishment in India that do carry on a significant economic presence in India will escape taxation. India claims to assert all Indian based e-commerce operators are already subject to taxes in India from the revenue generated from the domestic market. India further asserts, the EL does not discriminate against any U.S. companies, as it applies equally to all non-resident e-commerce operators, irrespective of their country of residence.

India also asserted that the levy was one of the methods suggested by 2015OECD/G20 Report on Action 1 of BEPS Project which was aimed at tackling the taxation challenges arising out of digitization of the economy.

India’s Union Budget 2021 – 2022 provided some relief to the 2% EL that was imposed in 2020. It is a step forward with clarification that the taxation of royalties and “fees for technical services” (“FTS”) are excluded and EL shall not apply if the consideration paid is taxable as royalty or as FTS.

The Union Budget also provided provisions expanding the definition of e-commerce services to include one or more of the following activities when carried out online:

• Acceptance of offer for sale
• Placing the purchase order
• Acceptance of the purchase order
• Payment of consideration, or
• Supply of goods or provision of services, partly or wholly

Additionally, it has also been clarified that e-commerce companies/operator will attract EL irrespective of the ownership status of the goods and services being sold. All the amendments will be in effect retrospectively, i.e. from 1st April, 2020.

What is the Next Step for Companies to Think About?

• Evaluate whether EL is applicable to your business in India.
• Consider the mechanics of the EL by tracking eligible transactions.
• As the EL is outside the ambit of Indian Income Tax Act, 1961, consider how it will impact your tax position and any tax treaty implications.
• April 1, 2020 is the effective date of the EL, is there a financial statement impact to your Company? Are you required to accrue the liability?
• Non-compliance will attract interest or penalties, therefore undertake necessary actions.