Has Budget 2021 Expanded The Scope Of Digital Tax?

Budget 2021 has provided certain clarifications on the contours of equalisation levy for an online provider of goods and services.

Last year, the government had imposed a 2% tax on the sale of goods and services that take place through non-resident digital operators having an annual turnover or sales of more than Rs 2 crore. At that time, it faced criticism that the levy was broad and unclear. And just last month, an investigation by the U.S. Trade Representative office had concluded India's equalisation levy to be discriminatory.

The clarifications in the Finance Bill, 2021 are a “step forward” in explaining what was a nuanced issue in law, according to Mukesh Butani, managing partner at BMR Legal.

Others like Meyyappan Nagappan, leader - digital tax at Nishith Desai Associates, said the “clarifications” will continue to cause confusion and considerably expand the scope of the levy.

Experts BloombergQuint spoke with explained the kinds of transactions that will now attract the levy after the clarifications:

• A hotel chain that's offering services in physical space but allows online booking.
• Payment gateways and payment aggregators that may only be facilitating the online payment for an offline transaction.
• An online marketplace that takes a commission for selling someone's goods may have to pay tax on not just the commission but the entire sale amount. So, if an Indian resident purchases goods from Amazon U.K. or Alibaba, they will have to pay a levy on the entire sale amount and not just the commissions they receive on the sale.

Finance Minister Nirmala Sitharaman made three key clarifications in Budget 2021:

1. Services Taxable As Royalty Out Of Ambit

The government has clarified that the services which are subject to tax as royalty or fees for technical services under the Income Tax Act will be out of the ambit of equalisation levy.

This aspect required clarity since there was a question whether royalty payments for software transactions or payments for technical services will be subject to a 10% rate laid down under the income tax law or equalization levy at 2% , said Nagappan.

In a welcome move, it has been clarified that royalty and fees for technical services wouldn't be subject to this levy where such services are taxable under income-tax law, Indruj Rai, partner at Khaitan & Co., pointed out.

2. What Qualifies As E-Commerce Supply or Service?

As per the amendment introduced last year, supply of goods or services was made subject to equalisation levy if :

• It's made to a person resident in India, or
• To a person who buys the goods or services through an IP address located in India, or
• To a non-resident in specified circumstances.

This year, the government has clarified that e-commerce supply or service will be subject to equalisation levy when any of the following activities take place online:

• Acceptance of the offer for sale.
• Placing the purchase order.
• Acceptance of the purchase order.
• Payment of consideration.
• Supply of goods or provision of services, partly or wholly.

The clarification suggests equalisation levy would even cover brick-and-mortar firm businesses that have an e-commerce model, pure e-commerce model, marketplace model and an intermediary as well, said Butani.

Offline transactions that may have even a minor digital element, according to Nagappan, could be potentially covered.

So far, the objective appeared to be to tax entities with voluminous digital transactions in India, but with this clarification, it seems even one-off digital transactions will be covered, Nagappan pointed out.

3. Levy Will Apply On The Entire Sale Amount

Budget 2021 has clarified that the taxable amount for which the equalisation levy has to be paid by an e-commerce platform will include the entire sale amount.

It has proposed an amendment to say that consideration received or receivable from e-commerce supply or services shall include:

• Consideration for sale of goods irrespective of whether the e-commerce operator owns the goods.
• Consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator.

This means that the entire value of goods or services would be taxed even where the goods or services are provided by a person other than the aggregator, Rai said.

The move is at odds with trying to tax only the income of the e-commerce operator, says Nagappan. The levy, he said, should be payable only on the income of the operator i.e. the commission and not on the income of the seller.

“For marketplaces operating under certain models, this is likely to have a significant impact.”

The clarifications will have a retrospective effect and will be applicable from April 1, 2020, as per the Finance Bill.