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Rashmin Sanghvi & Associates

Chartered Accountants

220, 2nd Floor, Arun Chambers,
Tardeo Road,
Mumbai - 400 034,
Maharashtra, India.

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Executive Summary & Background



II. Equalisation Levy - Executive Summary & Background


CA Rashmin Chandulal Sanghvi

II.1 Executive Summary:

Equalisation Levy (EL) is a direct tax on E-Commerce Service revenues earned by Non-Residents of India. World experts in International Taxation have been debating “on how to tax cross border
E-Commerce revenues”. OECD & UN have no answer. BEPS Action Task Force 1 needs five more years to come out with an answer. EL is India’s way of imposing tax on E-Commerce.

1.1 Existing rules of international taxation are incapable of dealing with E-Commerce business. Core weakness is that : Concept of Permanent Establishment is outdated. PE – a threshold to determine COS jurisdiction on NR’s business income requires fixed geographical location. For E-Commerce, geography is irrelevant. Result is, E-Commerce MNCs earn huge revenue from COS and are not liable to pay any income tax in COS. This is a systemic weakness in existing rules. It is now admitted by OECD and global tax experts. (Deficiencies in the OECD model are listed in para I.1 and II.8). However, even after discussing the subject for 20 years, OECD has no solution to remove the weakness.

Under the Existing rules, E-Commerce MNCs can set up subsidiaries in tax havens and avoid COR taxes also. This tax can be avoided despite existing CFC & transfer Pricing rules. This has been noted by BEPS groups. By separate Action Reports CFC rules & Transfer Pricing rules are being strengthened to curb COR tax losses. Since COR losses will be curbed, BEPS groups are satisfied. They see no reason to curb COS tax losses.

Since the tax avoidance is due to the systemic weaknesses in the existing rules of International Taxation; one cannot allege that the NR has resorted to any – Base Erosion or Profits shifting arrangements.

To curb – both COR & COS tax losses, domestic laws & DTA models need to be significantly revamped.

1.2 Because of this reason the situation has so developed and will be further strengthened that:

In E-Commerce business only COR will get all the tax. COS will not get any share. This is contrary to the basic theme of Double Tax Avoidance Agreement (DTA).

Theme is:

(a) There should be no double tax; and

(b) both COR & COS should share the tax revenue.

1.3 It so happens that most of the E-Commerce giants are residents of one country and earn revenue globally. Hence not sharing tax revenue with COS suits that COR.

And COR won’t allow to change the OECD rules of International Taxation.

This has caused a situation where: OECD even in October 2015 – after 20 years of study of E-Commerce; wants 5 more years to discuss.

1.4 In the circumstances, different countries have already adopted different ways to levy tax on Non-Resident entities providing E-Commerce services.

1.5 India did not take any Unilateral action.

1.6 Only when the G20/OECD Task Force gave BEPS Action 1 report; India has come out with Equalisation Levy – a tax on E-Commerce services. This law is the first step. All steps could not be taken up at the first instance because of the main cause – the inadequate OECD Model Convention has not been amended. When the OECD model is amended all weaknesses of Equalisation Levy can be removed.

1.7 China has refused entry to the foreign E-Commerce giants – Google, Facebook & Twitter. For “Baidu” (alternate to google) & “51.com” (alternative to Facebook) China is COR as well as COS. China does not suffer tax loss because of inadequate OECD Model Convention. Hence China watches with amusement the struggle between the rest of the nations.

1.8 The weaknesses in the EL can be divided into following categories:

1.8.1 COR Lobby: Weaknesses in EL because of weaknesses in OECD Model Convention. OECD model convention needs revamping. COR lobby does not permit it. (See para I.3 below.) If the model convention is revamped, EL can be improved . DTA can be applied and double tax can be avoided. Assessee can get credit in COR for tax paid in COS. There can be other options also.

1.8.2 Tax Burden. Weaknesses because of inadequate logistics. GOI needs to pass appropriate law. Software has to be prepared & synchronized. When this is done, the tax burden can be shifted to the Non-Resident assessee.

1.8.3 EL is a law in transit and subject to contingencies. This law needs to be expanded to shift the burden (of tax plus compliance procedures) to the Non-Resident. Separate double tax avoidance agreement can be executed for EL.

If the steps as given in para 1.8.1 are taken; steps under 1.8.3 won’t be required.

II.2 Background:

Finance Act, 2016 has introduced Equalisation Levy (EL) through Chapter VIII. Sections 163 to 180. Relevant amendments have been made in the ITA also.

2.1 Non-Resident E-commerce companies like Facebook, Google, etc. are earning substantial revenues from India and not paying any income tax in India. Some of them are avoiding Income-tax in the Country of Source (COS) as well as Country of Residence (COR). E-commerce business is growing globally at the fastest rate and no Government in the world can allow this business to go tax free.

2.2 It is now admitted by OECD, G20 and the Task Force on Digital Economy and other concerned authorities that under the present rules of international taxation, E-commerce companies can escape taxation. The main reason is that - under the existing rules, COS can tax a non-resident providing E-commerce services only if the non-resident has a Permanent Establishment (PE) in the COS. And a PE is defined as a fixed place of business. E-commerce companies do not need PE in any COS. They can set up the companies in tax havens and avoid COR tax also. For the last few years, there was strong public criticism – in Britain and other European countries - of these companies escaping taxation. In the light of the American and European financial crisis, G20 countries asked OECD to come out with recommendations for necessary modifications in the existing rules so that E-commerce companies also can be taxed.

2.3 BEPS Action Report No. 1 on Digital Commerce has discussed these issues. It has not made any specific recommendation. However, it has given three different options. One of the options is Equalisation Levy. When a company resident in COS earns revenue from E-commerce business, that company has to pay indirect taxes as well as Income-tax. However, when a non-resident company provides E-commerce services, it escapes Income-tax. Equalisation Levy tries to make a level playing field for both – Resident & Non-Resident.

2.4 In India, “E-commerce Committee” was appointed to study the subject and to recommend appropriate law for taxing NR E-commerce entities. Committee has given its report & the Government has accepted the report by introducing the tax.

2.5 Entirely Personal View:

Chapter VIII of The Finance Act, 2016 is a work-in-progress. A lot more developments will still take place. BEPS Task Force on Digital Economy has to still work on Action 1 report. BEPS Task Force on Multilateral Treaty has to work on Action 15 report. Within India considerable work still needs to be done. Eventually all the weaknesses of EL can be avoided and a fair system of taxing E-Commerce income can be worked out.

2.6 There have been many queries and criticisms of Equalisation Levy. This ‘Paper’ in Part I tries to answer most of these queries and criticisms. It is admitted that this law needs substantial change. Reasons why a better law has not come out at the first stage itself; are also given elaborately in Parts IV & V.

Part II on queries and comments again responds to specific queries. To an extent it is repetition of the Paper in Part I. The “Queries & Responses” system makes it easier for the reader. Also, some complex issues become clear when repeated from different angles/ view points.

2.7 This paper explains in details why the terms “E-Commerce” & “Digital Commerce” are incorrect for a tax law They are used in this paper only because they are popular.

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