1. Digital Tax: The Backdrop
With the expansion of information and communication technology, the supply and procurement of digital goods and services have undergone exponential expansion everywhere, including India. The digital economy is growing at a faster rate than the global economy as a whole.
Currently, in the digital domain, business may be conducted without regard to national boundaries and may dissolve the link between an income-producing activity and a specific location. From a certain perspective, business in digital domain doesn't seem to occur in any physical location but instead takes place in the nebulous world of "cyberspace." Persons carrying business in digital domain could be located anywhere in the world.
These new business models have created new tax challenges. The typical direct tax issues relating to e-commerce are the difficulties of characterizing the nature of payment and establishing a nexus or link between a taxable transaction, activity and a taxing jurisdiction, the difficulty of locating the transaction, activity and identifying the taxpayer for income tax purposes. The digital business fundamentally challenges physical presence-based permanent establishment rules. If permanent establishment (PE) principles are to remain effective in the new economy, the fundamental PE components developed for the old economy i.e. place of business, location, and permanency must be reconciled with the new digital reality.
The Organization for Economic Cooperation and Development (OECD) has recommended, in Base Erosion and Profit Shifting (BEPS) project under Action Plan 1, several options to tackle the direct tax challenges which include modifying the existing Permanent Establishment (PE) rule to include that where an enterprise engaged in fully de-materialized digital activities would constitute a PE if it maintained a significant digital presence in another country's economy. It further recommended a virtual fixed place of business PE in the concept of PE i,e creation of a PE when the enterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on business through that website. It also recommended imposition of a withholding tax on certain payments for digital goods or services provided by a foreign e-commerce provider or imposition of a equalisation levy on consideration for certain digital transactions received by a non-resident from a resident or from a non-resident having permanent establishment in other contracting state.
1.1 Equalisation Levy
Considering the potential of new digital economy and the rapidly evolving nature of business operations and to address these challenges, the Finance Act 2016 has inserted a new section 165 in the Income Tax Act, to provide for an equalisation levy of 6 % of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment ('PE') in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India, if such consideration exceeds Rs 1 lakh p.a.
Currently, the specified services cover online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement. The government is also empowered to notify other services. The levy is to be collected and deposited by the payer who is receiving the specified service.
1.2 Practical Illustration on Equalisation Levy u/s 165 of the Income Tax Act, as inserted by the Finance Act 2016.
M/s XYZ Pvt Ltd, an Indian Company, has availed the online advertisement services of Google for its business promotion and has made a payment of Rs. 5,00,000/- to Google towards these online advertisement services.
As per provisions of section 165 of the Income Tax Act, M/s XYZ Pvt Ltd shall be required to deduct an equalization levy @ 6% from the payment of Rs. 5,00,000/- to Google, i.e. Rs. 30,000/- shall be deducted and deposited by M/s XYZ Pvt Ltd as equalization levy and Google shall receive the payment of Rs. 4,70,000/-.
1.3 Expansion in the Scope of Equalisation Levy by the Finance Act 2020
The Finance Act 2020 has now introduced a new provision i.e. section 165A in the Income Tax Act, to enhance the scope of the Equalisation Levy. Equalisation Levy will now be extended to an e-commerce operator on ‘e-commerce supply and services’ undertaken on or after 1 April, 2020.
An 'e-commerce operator' has been defined to mean a non- resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both.
'e-commerce supply and services' has been defined to mean:
- online sale of goods owned by the e-commerce operator; or
- online provision of services provided by the e-commerce operator; or
- online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
- any combination of the above activities.
This Equalisation Levy shall be levied at the rate of 2% on the amount of consideration towards e-commerce supply and services made or provided or facilitated by an e-commerce operator to:
i. a person resident in India;
ii. a non-resident in the following specified circumstances:
- Sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement through internet protocol address located in India.
- Sale of data, collected from a person who is resident in India or uses internet protocol address located in India.
iii. To a person who buys such goods or services or both using internet protocol address located in India.
Section 165A(2) of the Income Tax Act provides that the Equalisation Levy shall not be levied:
- where the e-commerce operator has a Permanent Establishment (PE) in India and the e-commerce supply or service is effectively connected to its PE;
- where Equalisation Levy is already levied on online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement as per provisions of section 165 of the Income Tax Act;
- where sales, turnover or gross receipts of the e-commerce operator from the e-commerce supply and services is less than Rs. 2 crores during the previous year. This threshold limit of Rs. 2 crores is not buyer specific but includes total turnover of the e-commerce operator from all the specified buyers during the previous year.
As a corollary, if the total turnover of the non-resident e-commerce operator having no PE in India, from the online supply of goods or services to the specified buyers, exceeds Rs 2 crores, in the previous year, then that non-resident e-commerce operator shall be required to pay and deposit an equalisation levy @ 2% on its total turnover from all the specified buyers in the previous year to the Exchequer in India.
Consequent to this new Equalisation Levy, an amendment has been made under section 10(50) of the Income Tax Act. Accordingly, any income arising from e- commerce supply or services which will be covered by the Equalisation Levy will now be exempt from tax under section 10(50).
This amendment to the Equalisation Levy provisions now introduces a kind of digital tax on non-resident e-commerce operators at 2% on the revenue they generate in India from e- commerce supply or services. This levy has to be deposited by the e-commerce operator and not by the buyer of the supply or service.
1.4 Practical Illustration on Levy of Equalisation Levy of 2% on Foreign e-Commerce Operator u/s 165A of the Income Tax Act.
Amazon receives a consideration of Rs. 100 crores towards the e-commerce supply of goods and services in its Indian market place amazon.in, (which in our example is not to be considered as its PE in India), to Indian Residents during the previous year 2020-21. Thus, by virtue of the newly inserted section 165A of the Income Tax Act, Amazon shall be required to deposit an equalisation levy @ 2% on its total turnover of Rs 100 crores from the e-commerce supply of goods and services to the Indian Residents, i.e Rs. 2 crores with the Exchequer in India.
2. Insertion of New Section 194-O for Levy of TDS @ 1% on e-Commerce Transactions.
In order to widen and deepen the tax net by bringing participants of e-commerce within tax net, the Finance Act 2020 has inserted a new section 194-O in the Act so as to provide for a new levy of TDS at the rate of one per cent, with the following key points:
- The TDS is to be paid by e-commerce operator for sale of goods or provision of service facilitated by it through its digital or electronic facility or platform;
- E-commerce operator is required to deduct tax at the time of credit of amount of sale or service or both to the account of e-commerce participant or at the time of payment thereof to such participant by any mode, whichever is earlier.
- The tax at one per cent is required to be deducted on the gross amount of such sales or service or both.
- Any payment made by a purchaser of goods or recipient of services directly to an e-commerce participant shall be deemed to be amount credited or paid by the e-commerce operator to the e-commerce participant and shall be included in the gross amount of such sales or services for the purpose of deduction of income-tax.
- The sum credited or paid to an e-commerce participant (being an individual or HUF) by the e-commerce operator shall not be subjected to provision of this section, if the gross amount of sales or services or both of such individual or HUF, through e-commerce operator, during the previous year does not exceed five lakh rupees and such e-commerce participant has furnished his Permanent Account Number (PAN) or Aadhaar number to the e-commerce operator.
- A transaction in respect of which tax has been deducted by the e-commerce operator under this section or which is not liable to deduction under the exemption discussed in the previous bullet, there shall not be further liability on that transaction for TDS under any other provision of Chapter XVII-B of the Act. This is to provide clarity so that same transaction is not subjected to TDS more than once. However, it has been clarified that this exemption will not apply to any amount received or receivable by an e-commerce operator for hosting advertisements or providing any other services which are not in connection with the sale of goods or services referred to in sub-section (1) of the proposed section.
- 'e-commerce operator' is defined to mean any person who owns, operates or manages digital or electronic facility or platform for electronic commerce. Such e-commerce operator would be liable for TDS even if it is not responsible for paying to an e-commerce participant.
- 'e-commerce participant' is defined to mean a person resident in India selling goods or providing services or both, including digital products, through digital or electronic facility or platform for electronic commerce.
- 'electronic commerce' is defined to mean the supply of goods or services or both, including digital products, over digital or electronic network.
- 'services' is defined to include fees for technical services and fees for professional services, as defined in section 194J.
Consequential amendments are being proposed in section 197 (for lower TDS), in section 204 (to define person responsible for paying any sum) and in section 206AA (to provide for tax deduction at 5 percent in non PAN/ Aadhaar cases).
This amendment will take effect from 1st April, 2020.
2.1 Explaining the Newly Inserted Provision of Deduction of TDS u/s 194O with Practical Examples.
1. Shashank, (recipient of services), a tax practitioner, orders his favourite pepe paneer pizza of Dominos (e-commerce participant), on Zomato (e-commerce operator) and makes the online payment of Rs. 300/-.
In this e-commerce transaction, the payment of Rs. 300/- being made by an individual Shashank, (recipient of services), directly to Dominos (e-commerce participant), shall be deemed to be amount credited or paid by Zomato (e-commerce operator) to Dominos (e-commerce participant) and shall be included in the gross amount of such sales or services for the purpose of deduction of income-tax. Dominos, furnishes its PAN/Aadhar Card to Zomato.
Zomato (e-commerce operator), shall be required to deduct TDS of Rs. 3/- @ 1 % u/s 194O, on Rs. 300/-, and deposit the said amount of TDS with the Exchequer, just like any other TDS and Dominos (e-commerce participant) can claim the credit of this TDS u/s 194O in its Return of Income.
2. On another day, being conscious about his junk diet, Shashank orders a ‘Home Thali’ from ‘Homely Kitchen’ a brand listed by Ms Arti (an individual e-commerce participant, having her annual sales of Rs. 5 lakhs from her brand ‘Homely Kitchen’ listed on Swiggy (e-commerce operator) and makes the payment of Rs 300/-.
Swiggy (e-commerce operator), shall be required to deduct TDS of Rs. 3/- @ 1 % u/s 194O, on Rs. 300/-, and deposit the said amount of TDS with the Exchequer, just like any other TDS.
It is pertinent to mention here that TDS @ 1% is applicable only, if Ms Arti furnishes her PAN/Aadhar Card Number. In the absence of PAN/Aadhar Card Number the rate of TDS deduction shall be 5%.
Further, if Ms Arti’s gross annual sales from her brand of ‘Homely Kitchen’ listed on Swiggy, are Rs 4 lakhs (less than the prescribed threshold of Rs. 5 lakhs, in case of an individual/HUF e-commerce participant’), then Swiggy shall not deduct any TDS u/s 194O of the Act.
3. Concluding Remarks
The above discussed newly inserted legislative provisions viz. expansion in the scope of equalisation levy on digital/online e-commerce supply of goods and services by non-resident e-commerce operators @ 2% u/s 165A of the Income Tax Act and the levy of TDS @ 1%, on e-commerce transactions, u/s 194-O of the Income Tax Act, clearly amplifies the Indian Government’s firm determination and swift inclination towards the introduction of ‘Source Rule’ based Digital Tax, on the big non-resident e-commerce players, having no physical presence in India, but generating substantial revenue in India, through their digital e-commerce platforms and cyber-spaces.
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