Equalization levy and goods and services tax in e-commerce transactions

India originally introduced an equalization levy in 2016. Broadly, a 6 percent levy applies as a withholding tax on specified income received by a non-resident without a permanent establishment (PE) in India from digital transactions relating to online advertising and related activities. The scope of this levy was expanded by the Finance Act, 2020, effective from April 1, 2020, to introduce a 2 percent levy on consideration received or receivable by a non-resident "e-commerce operator" from "e-commerce supplies of goods or services" within India. It's important to highlight that this levy operates under a distinct legal provision separate from Indian income tax legislation.

Under the GST law in India, there exists a category known as Online Information Database Access and Retrieval (OIDAR) services. This category encompasses services facilitated by information technology through the internet or an electronic network, typically characterized by automated delivery with minimal human intervention. OIDAR services include a broad range of digital offerings like internet advertising, cloud services, e-books, movies, music, software, digital data storage, online gaming, among others.

In the context of non-resident service providers supplying OIDAR services to Indian customers not registered for GST (i.e., business-to-consumer or B2C supplies), these providers are obligated to register for GST in India. They are required to collect and remit GST on these services. Initially, OIDAR services were subject to service tax, a precursor of GST, from December 1, 2016, to June 30, 2017.

Hence, there exists an interrelationship between GST and the equalization levy concerning specific cross-border electronic supplies made by non-resident e-commerce operators. This interaction has the potential to lead to double taxation because the two levies, equalization levy, and GST, are separate and unrelated taxes, providing no offset against one another.

Applicability of equalization levy

The equalization levy applies to the amount of consideration received or receivable by an e-commerce operator from e-commerce supplies or services made, provided, or facilitated by them to:

• An Indian resident.
• A non-resident in "specified circumstances," which include:
  • Sale of advertising that targets Indian customers (defined as persons who reside in India, or access the advertisement though an IP address located in India); or
  • Sale of data collected from Indian customers.
• A person who purchases goods, services, or both using an IP address located in India.

An e-commerce operator is defined as a non-resident individual or entity that owns, operates, or manages a digital or electronic facility or platform for online sales of goods, online provision of services, or both.

E-commerce supply or services means:

• Online sale of goods owned by the e-commerce operator.
• Online provision of services by the e-commerce operator.
• Facilitation of online sale of goods, provision of services, or both by the e-commerce operator.
• A combination of the above.

Exclusions

The levy does not apply where:

• The e-commerce operator has a PE in India, and the e-commerce supply or services are effectively connected with the PE.
• The consideration received already is subject to the equalization levy at 6 percent as online advertising and related activities.
• The e-commerce operator's sales, turnover, or gross receipts from e-commerce supplies or services amount to less than INR 20 million during the financial year.

Income tax exemption

The income tax legislation has been amended to provide an exemption from income tax as from April 1, 2021, for any income arising to an e-commerce operator that already is subject to the equalization levy. Consequently, for the period April 1, 2020 to March 31, 2021, there is no exemption under the income tax legislation, and the consideration received by an e-commerce operator from e-commerce supplies or services may be subject to both income tax and the equalization levy.

Compliance

The equalization levy is required to be paid on a quarterly basis by the non-resident e-commerce operator, as outlined below:

An annual statement must be filed by June 30 of the relevant financial year, i.e., for the period April 1 to March 31, the annual statement must be submitted by June 30. Simple interest at the rate of 1 percent per month or part month is imposed on late payments, and a non-resident e-commerce operator failing to pay the levy is subject to a penalty equal to the levy amount. An additional penalty of INR 100 per day is imposed for failing to file the annual statement, for the period during which the default continues.

To meet the compliance requirements regarding tax payment and return filing, these e-commerce operators must obtain a Permanent Account Number (PAN). This is a new requirement for them, as they may not have needed it previously when their incomes were not subject to taxation in India.

Interaction between equalization levy and OIDAR

In expanding the scope of the equalization levy, the Indian government appears to have drawn inspiration from the principles of GST applied to Online Information Database Access and Retrieval (OIDAR) supplies. The levy extension now encompasses e-commerce supplies provided by non-resident e-commerce operators to specified categories of individuals. These supplies include services delivered through information technology over the internet or an electronic network with minimal human intervention.

When assessing the applicability of the equalization levy to electronic supplies made by non-resident e-commerce operators, it becomes crucial to understand the potential GST obligation on OIDAR services and vice versa. Several key factors require reconsideration from a GST perspective to ensure alignment between the equalization levy and GST positions, including:

• The degree of human involvement in service provision.
• The involvement of intermediaries or e-commerce operators in processing payments or interacting with end-users.
• GST registration status of end-users.

On July 21, 2020, India's Central Board of Direct Taxes and Central Board of Indirect Taxes and Customs reached an agreement to exchange information, both on request and spontaneously, in addition to regular data exchanges, to identify instances of tax evasion. With this extensive sharing of information between authorities, tax enforcement measures are expected to become more rigorous. Therefore, ensuring alignment between GST and equalization levy positions becomes even more crucial.

In cases where businesses do not comply with GST compliance obligations or fail to pay the GST due, they may face penalties. Simple interest at the rate of 18% per annum, along with a penalty equivalent to the tax due, could be imposed.