The Indian authorities launched provisions for Equalisation Levy (EL 1.0) on digital promoting and associated companies in 2016. This levy was prolonged to all kinds of digital actions by means of the Finance Act, 2020 (EL 2.0). EL 1.Zero was launched primarily based on the work of the Organisation for Financial Cooperation and Improvement (OECD) underneath the Base Erosion and Revenue Shifting Venture underneath Motion Plan 1 on Digital Financial system. Whereas the Motion Plan 1 didn’t give any particular suggestions, it mentioned a couple of various approaches, one in all them being an Equalisation Levy-type provision, which India adopted.
Subsequently, OECD itself determined that extra work was wanted to evolve a consensus method to handle the challenges of the Digital Financial system and arrange the Inclusive Framework. The Inclusive Framework has since made suggestions known as Pillar 1 proposals which give an method by which digital companies could possibly be taxed. Nevertheless, the proposals are nonetheless underneath dialogue and a whole unity is but to emerge amongst all international locations. India and the US, two key stakeholders, are additionally not absolutely aligned to the present proposals.
In the meantime, a world consensus has remained elusive, whilst many international locations have legislated unilateral measures much like EL to tax digital firms. Developed international locations just like the UK, France, Australia, Spain, Austria, and so on, and lots of creating international locations like Indonesia, Turkey, Malaysia, Chile, and so on, have proposed or already applied such levies. EL2.Zero was launched by India within the wake of those developments. Ideally, international locations ought to anticipate a world consensus, which might keep away from dangers of double taxation that may be detrimental for the digital ecosystem. Nevertheless, the counter from international locations is that such a wait can’t be inordinate, and that the unilateral measures can be withdrawn as soon as such a consensus emerges. Whereas there isn’t a official line from India on this, it’s anticipated that if a world consensus emerges, India would rethink EL 1.Zero and EL 2.0.
One other key improvement related with regard to the way forward for EL 2.Zero is the US Commerce Consultant (‘USTR’) investigation underneath Part 301 of the Commerce Act of 1974. In keeping with the related regulation, USTR is empowered to research actions by international locations which might trigger hurt or is prejudicial to the US pursuits and suggest retaliatory measures. Such an investigation has been launched by the USTR towards DST from nearly all international locations, together with EL 2.Zero by India. The investigations towards France began earlier in 2019. After concluding that the French regulation was discriminatory and prejudicial to US pursuits, as a counter measure, it proposed tariffs on varied French merchandise. France agreed to defer its DST and the matter is now in a stalemate. The USTR report on the EL 2.Zero was launched earlier this month. India has strongly objected to the findings and maintained that the levy is equitable and doesn’t significantly discriminate towards any US firms. The subsequent step often is for the USTR to suggest measures, like within the French case. Nevertheless, the plan of action may be impacted by the brand new administration in Washington and in case the Inclusive Framework discussions progress additional.
The place does that depart digital firms which might be doing enterprise within the Indian market? EL 2.Zero has been on the statute for nearly a yr. The compliance with the identical has been step by step rising. Nevertheless, it could possibly be a lot greater if most of the ambiguities within the regulation could possibly be addressed. The upcoming Funds is an efficient alternative for the federal government to offer some steering.
The scope of EL 2.Zero will not be totally according to the above developments which all alongside have been centered on the digital economic system. The present language appears vast and will cowl a variety of enterprise fashions together with brick-and-mortar firms in the event that they do any actions similar to intra group companies or sale of their items on-line and produce them into the ambit of EL 2.0.
The date of impact of EL 2.Zero was April 1, 2020. Nevertheless, the federal government did realise that among the present provisions on taxation of royalties, charges for technical companies, and so on, may create a twin taxation, and therefore supplied an exemption from such taxes for earnings which is topic to EL 2.0. Nevertheless, such exemptions kick in from April 1, 2021, thereby making a danger of double taxation for Monetary 12 months 2020-21.
The regulation levies 2 per cent of the quantity of consideration obtained or receivable by e-commerce operators, with out defining the time period ‘consideration’. This has created ambiguity as to what can be the quantity of consideration that must be taken for marketplaces. It’s unclear whether or not EL 2.Zero must be paid on the web fee which is their very own earnings or whether or not on all the consideration collected on behalf of sellers.
One other points that come up on account of the dearth of definition of ‘consideration’ is the therapy of reductions, gross sales returns, unhealthy money owed, and so on. These are real enterprise conditions by which the earnings of digital suppliers is decreased and therefore it must be clarified that such conditions will scale back the bottom liable to EL.
EL 2.Zero provisions deliver into its ambit revenues of non-Indian digital firms from specified revenues earned from different non-Indian prospects, if an Indian IP tackle is used or is in relation to Indian information. Monitoring of such Indian touchpoints are administratively onerous and will not even yield sufficient revenues to justify the onerous process.
The federal government has been very attentive to the wants and asks of business and keenly centered on the Ease of Doing Enterprise in India. We hope that solutions to among the above ambiguities discover their approach into the upcoming Funds. The federal government may additionally think about offering a transparent highway map on this levy because the OECD works in direction of making a consensus, to offer certainty to taxpayers that that is solely an interim measure. Lastly, with India more and more taking part in a regional and a world function on many issues, it may play an lively function on shifting past the present deadlock and serving to attain a consensus on this important space.
The writer is associate (tax & regulatory), PwC India