Equalisation Levy 2020

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    • Recently, India and USA agreed on a transitional approach on Equalisation Levy 2020.

    About

    • India and United States joined 134 other members of the OECD/G20 Inclusive Framework (including Austria, France, Italy, Spain, and the United Kingdom) in reaching agreement on the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy.
      • Pillar One, which is about reallocation of an additional share of profit to the market jurisdictions and
      • Pillar Two, consisting of minimum tax and subject to tax rules.
    • The United States and Austria, France, Italy, Spain, and the United Kingdom reached an agreement on a transitional approach to existing Unilateral Measures while implementing Pillar 1. 
    • India and the United States have agreed that the same terms that apply under the October 21 Joint Statement shall apply between the United States and India with respect to India’s charge of 2% equalisation levy on e-commerce supply of services and the United States’ trade action regarding the said Equalisation Levy. 
    • The settlement is broadly on the lines of the one reached under the Unilateral Measures Compromise reached among the UK, Austria, France, Italy and Spain with the US on October 21 this year.
    • However, the interim period that will be applicable will be from 1st April 2022 till implementation of Pillar One or 31st March 2024, whichever is earlier.
    • The final terms of the Agreement shall be finalised by 1st February 2022.

    Background of the issue

    • The U.S. administration had announced initiation of investigation under section 301 of the U.S. Trade Act, 1974 against the taxation on digital services adopted or under consideration by countries, including the Equalisation Levy applied by India. 
    • With respect to India, the focus of the investigation was on the 2% Equalisation Levy (EL) levied by India on e-commerce supply of services. 
    • The U.S. investigation included whether the EL discriminated against the U.S. companies, was applied retrospectively, and diverged from U.S or international tax norms due to its applicability on entities not resident in India.
    • It was clarified that the EL was applied only prospectively, and has no extra-territorial application, since it is based on sales occurring in the territory of India through digital means.
    • India based e-commerce operators are already subject to taxes in India for revenue generated from the Indian market. However, in the absence of the EL, non-resident e-commerce operators (not having any Permanent Establishment in India but significant economic presence) are not required to pay taxes in respect of the consideration received in the e-commerce supply or services made in the Indian market. 
    • Applicability: 
      • The EL levied at 2% is applicable on non-resident e-commerce operators, not having a permanent establishment in India. 
      • The threshold for this levy is Rs. 2 crores, which is very moderate and applies equally to all e-commerce operators across the globe having business in India. 
      • The levy 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.
    • Suggested by: 
      • In addition, EL was one of the methods suggested by 2015 OECD/G20 Report on Action 1 of BEPS Project which was aimed at tackling the taxation challenges arising out of digitization of the economy.

    Significance of Recent Agreement

    • It will put to rest the trade conflict between India-US because of digital service taxes and will certainly facilitate ongoing trade negotiations between the countries.
    • The deal requires countries to remove all digital services tax and other similar unilateral measures.
    • It will ensure a level-playing field with respect to e-commerce activities undertaken by entities resident in India, and those that are not resident in India, or do not have a permanent establishment in India.
    • It will 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.

    Conclusion

    • This agreement is a sensible solution that will allow nations to concentrate on their collaborative action over the execution of the iconic OECD/G20 Inclusive Framework deal.   

    Equalisation Levy

    • Origin: 
      • Equalisation Levy was introduced in India in 2016, with the intention of taxing the digital transactions i.e. the income accruing to foreign e-commerce companies from India. 
    • Focus on: 
      • It is aimed at taxing business to business transactions.
    • Recent Update:
      • CBDT has further extended the last date for furnishing the Equalisation Levy Statement (Form-1) for the FY 2020-21 to 31st December 2021.
    • Eligibility: 
      • Companies with a turnover of over Rs. 2 crore, will pay this levy on the consideration received for online sales of goods and services.   
    • Purpose: 
      • The purpose of the levy 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
    • Background and Relevance of Equalisation Levy
      • Over the last decade, Information Technology has gone through an exponential expansion phase in India and globally. This has led to an increase in the supply and procurement of digital services.
      • Consequently, this has given rise to various new business models, where there is a heavy reliance on digital and telecommunication networks.
      • As a result, the new business models have come with a set of new tax challenges in terms of nexus, characterization, and valuation of data and user contribution.
      • The combination of inadequacy of physical presence based nexus rules in the existing tax treaties and the possibility of taxing such payments as royalty or fee for technical services creates a fertile ground for tax disputes.
      • To bring clarity in this regard, the government introduced vide Budget 2016, the equalisation levy to give effect to one of the recommendations of the BEPS (Base Erosion and Profit Shifting) Action Plan.
    • Applicability of Equalisation Levy
      • Equalisation Levy is a direct tax, which is withheld at the time of payment by the service recipient. 
      • The two conditions to be met to be liable to equalisation levy:
        • The payment should be made to a non-resident service provider;
        • The annual payment made to one service provider exceeds Rs. 1,00,000 in one financial year.
    • Services Covered Under Equalisation Levy
      • Currently, not all services are covered under the ambit of equalisation Levy. 
      • The following services covered:
        • Online advertisement
        • Any provision for digital advertising space or facilities/ service for the purpose of online advertisement
        • As and when any other services are notified will be included with the aforesaid services.
    • Rate of Tax Under Equalisation Levy:
      • Currently, the applicable rate of tax is 6% of the gross consideration to be paid.
    • Consequences of Delayed Payments
      • Interest is charged at 1% of the outstanding levy for every month or part thereof is delayed.
      • In case there is non-compliance on behalf of the service recipient:
        • Penalty for failure of payment:
          • Equalisation Levy not deducted: Penalty equal to the amount of levy failed to be deducted (along with interest and depositing of the principal levy outstanding).
          • Equalisation Levy deducted but not deposited: Penalty equal to INR 1,000/day subject to the maximum of the levy failed to be deducted (along with interest and depositing of the principal levy outstanding).
          • Disallowance of such expenditure in the hands of the payer (unless the defect is rectified).
        • Penalty for failure of filing statement of compliance:
          • INR 100/day for each day the non-compliance continues.
        • Prosecution:
          • If a false statement has been filed then the person may be subjected to imprisonment of a term of up to 3 years and a fine.

    Source: PIB