Equalisation levy on e-commerce transactions likely to increase challenges

With the Finance Bill 2020 expanding the scope of the equalisation levy on sales by foreign e-commerce companies, one can expect legal challenges on extra-territoriality
Equalisation levy on e-commerce transactions likely to increase challenges

Indian Finance Bill 2020 was passed yesterday in the Parliament. With the Finance Bill 2020 expanding the scope of the equalisation levy on sales by foreign e-commerce companies, one can expect legal challenges on extra-territoriality, said global consultancy firm EY on Tuesday.

This is because the provision seeks to cover non-resident to non-resident transactions that use Indian data while the Organisation for Economic Co-operation and Development (OECD) is still developing consensus on the taxable nexus and allocation of taxing rights, according to EY.

The scope of equalisation levy, which earlier was applicable only to advertising and related services, has now been expanded to cover digital e-commerce transactions into India as well as those transactions which use Indian data.

The new equalisation levy of 2 percent will cover e-commerce companies that do not have permanent establishments in India. The change came as a surprise to many as the provision was not proposed in the Union Budget presented by Finance minister Nirmala Sitharaman on February 1.

This could potentially cover all digital business earnings of more than Rs 2 crore of revenues from India or using Indian data, EY said. Due to the changes, e-commerce operators will not have recourse to favourable tax treaty provisions, EY said.

Unlike the earlier levy (on advertising), now the foreign e-commerce operator will be required to meet compliances in India which could also raise potential challenges, it added. The equalisation levy on foreign e-commerce companies will come into effect from April 1.

Unlike equalisation levy in case of advertisement and related services, compliance obligation, in this case, is on the e-commerce operator (non-resident), who is required to deposit the equalisation levy so collected on a quarterly basis and also file an annual return, EY said.

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