In April 2020, the provisions of 2% equalisation levy (EL) were introduced for taxing digital transactions and the consequent income earned by foreign e-commerce companies in India. At the time, it was specified that EL would not be levied on the business income earned by a non-resident e-commerce operator from supply of service which is effectively connected to its permanent establishment (PE) in India. However, there was ambiguity on the scope of EL regarding other income streams of a non-resident e-commerce operator such as royalty and fee for technical services.
Another issue that arose was in relation to the scope of EL on transactions which were conducted partly online and partly offline. Additionally, there was a mismatch between the effective date of provisions of EL i.e. 1 April 2020 and the exemption from income tax provisions to e-commerce transaction to which EL applied which started from 1 April 2021, thereby resulting in double taxation for such transactions for a period of one year.
These issues have been resolved through proposals presented in the Finance Bill, 2021 (Bill) as discussed below.
Royalty and fees for technical services payments excluded from the ambit of EL
The Bill clarifies that any consideration received or receivable for specified services and e-commerce supply of goods or services will not include consideration which is taxable as royalty or fees for technical services (FTS) in India under the Income Tax Act (ITA) read with the relevant treaty provisions. This is a welcome clarification as all licensing arrangements going forward will not be subject to EL once income tax has been paid on such royalty/FTS income earned from India.
Applicability of EL widened
EL is to be levied at the rate of 2% of the amount of consideration received or receivable by an e-commerce operator from ‘e-commerce supply or services’ made or provided or facilitated to specified persons. The definition of ‘e-commerce supply or services’ includes within its ambit ‘online sale of goods’ and ‘online provision of services’ and the Bill proposes activities that would be included within the ambit of ‘online sale of goods’ and ‘online provision of services’. The impact of this amendment is that EL would be applicable even if a part of the transaction is concluded online.
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