New Tax Burden On Foreign E-Commerce Companies: The Problem Of Two Hows 

Governments finds a treaty-proof shortcut to tax foreign e-commerce entities.

A customer shops for online- only brands of grooming products. (Source: BloombergQuint) 
A customer shops for online- only brands of grooming products. (Source: BloombergQuint) 

In a surprise move, the government has introduced a new tax levy on foreign e-commerce operators who don’t have a business presence in India. The levy has been brought in via an amendment to the Finance Bill, 2020. Starting April this year, all such non-resident entities will be subject to an equalisation levy on a quarterly basis. Simply put, income that foreign e-commerce entities are generating from India will now be subject to tax.

It’ll be applicable at the rate of 2 percent on sale of goods as well as services that take place through foreign e-commerce operators. Such supply would be subject to an 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. For instance, income from sale of data which is collected from a person residing or having an Indian IP address.

Experts BloombergQuint spoke with gave some illustrations of transactions that would be subject to this levy.

  • An Indian resident purchasing goods from Amazon U.K. or Alibaba.
  • A transaction between Amazon U.K. and Amazon India, too, would trigger this tax, since the latter would be treated as a resident.
  • Foreign online gaming platforms where a resident signs up using an Indian IP address;
  • Or a transaction between two non-residents where data of Indian residents is used to sell goods/services. Let’s say an Indian ethnic store in the U.S. is running a campaign on Facebook to target NRIs. For this advertisement campaign, assume Facebook has used data collected from Indians for modelling, targeting — while the target is NRIs, service provider is a non-resident, the payer is a non-resident but since the data of resident Indians is being used, such a transaction may also get covered. Another view on such a transaction is that the equalisation levy will be applicable only if the Indian ethnic store is targeting Indian residents or if data of Indian residents is being sold to it. The department will have to clarify this issue, experts said.

Companies that have a turnover or sales of more than Rs 2 crore, in the previous year, as a result of such supply will be subject to an equalisation levy.

What’s Prompted This Tax?

Currently, equalisation levy has to be paid by Indian companies advertising on foreign digital platforms. This tax has so far been imposed only on business-to-business transactions, and for the first time, equalisation levy has been brought in for business to consumer transactions, Mukesh Butani, managing partner at BMR Legal, told BloombergQuint.

The introduction of this tax has come as a surprise for most.

The government may have decided to introduce this levy as a result of deferral of significant economic presence rules, Butani said.

In budget 2018, the government had proposed to get its fair share of tax from business-to-consumer transactions by introducing the concept of significant economic presence. The idea was to tax profits of those digital businesses that don’t have a physical presence in India but derive significant economic value from the country. In this year’s budget, it was announced that SEP provisions have been deferred to April 1, 2021.

To implement SEP rules, the business connection rule will have to be amended. Even after that, it will be difficult to thrust income tax on such transactions because of the treaty provisions. But for equalisation levy, the government doesn’t need to unilaterally look at amending the domestic law to trigger changes in the treaty.
Mukesh Butani, Managing Partner, BMR Legal

So, equalisation levy in a way, is a shortcut for levy of tax on such transactions, Butani said.

The Problem of Two Hows

Experts pointed to two challenges in the implementation of this levy: how should e-commerce players apply it; and how should they account for cancellation charges, discounts, sales return, etc.

How To Apply The Equalisation Levy?

There are many foreign e-commerce entities that merely provide a platform to sellers and buyers, and receive a fee for such facilitation. In such cases, the buyer pays the seller directly. For such transactions, the equalisation levy would be levied on the commission paid to the foreign e-commerce entity, Rakesh Jariwala, partner at EY, said.

But many entities also work on an inventory model. For instance, a hotel booking site that makes bulk purchases and then resells them to customers. For such transactions, the 2 percent tax would be levied on the entire billing amount, he explained.

The tax department is yet to clarify its stance for both these models.

Since the liability to deposit the equalisation levy is on the foreign e-commerce operator, tracking certain transactions could be challenging.

Jariwala said tracking two buckets of transactions — between non-resident e-commerce entities and resident Indian buyers; and between non-resident e-commerce intermediary entities and resident buyers — would be relatively easier. The challenge will be the third bucket — non-resident to non-resident transactions.

It’ll also be difficult to determine if the Rs 2-crore threshold is breached due to sale, usage of resident Indians’ data. It is possible that the tax department may ask for data for attribution analysis, or perhaps adopt a the fractional apportionment approach.
Rakesh Jariwala, Partner, EY

How To Account For Cancellations, Sales Return?

The amendment to the Finance Bill, 2020 is silent on it.

For instance, if an Indian resident books an airline ticket on a foreign e-commerce platform and then cancels it, should the equalisation levy be applied?

Since this is a tax on transaction, the levy will be triggered but there is no mechanism prescribed to reverse it, Butani said.

There is a time lag between when the equalisation levy is triggered and when the foreign e-commerce entity has to deposit it with the government. Keeping in mind the principles of equity, the government must provide for mechanisms to reverse equalisation levy in such circumstances.
Mukesh Butani, Managing Partner, BMR Legal

Similarly, treatment of sales return, which are quite common in the e-commerce industry, is open ended as well. For instance, if a resident Indian has purchased goods worth $2,000 from a foreign e-commerce website and has returned goods worth $1,000, it would be important to have clarity that the tax will apply on net consideration, Jariwala said.

The first deadline to deposit this tax is July 7.

(Updates an earlier version to add another view on how the equalisation levy will impact transactions)