Recent developments in India concerning International Taxation, could be seen as an albatross around the neck for the non-resident e-commerce players. With an increase in compliance burden and potential increase of costs, many of the e-commerce players consider unilateral measures taken by India as a deterrent to an effective business model. In this regard, Bharathi Krishnaprasad (Principal Associate, Lakshmikumaran & Sridharan) and Harshit Khurana (Senior Associate) in their article today discuss various provisions of Indian Income Tax as applicable to e-commerce players in India. 

Briefly elucidating the provisions of equalisation levy as enhanced by Finance Act 2020, the authors state that considering that the levy has been introduced, not under the Income Tax law as tax on income, rather as an independent levy under a separate legislation, the non-resident e-commerce operators might be denied tax credits for the same. The authors also discuss the impact of the proposed profit attribution rules and Significant Economic Presence (SEP) under the domestic laws and opine that “these rules once implemented, will have significant impact on the traditional businesses as well.”  Further with respect to the recently introduced Sec.194-O, the authors highlight that the provision is silent on the residential status and thus one may take a position that non-resident e-commerce operator should not be obligated to deduct tax since responsibility of TDS deduction is of ‘any person’ making the payment, which would only mean residents who have tax presence in India. 

‘Taxation of E-commerce Players in India – A Holistic View’

A. Introduction

The recent developments in India concerning International Taxation, could be seen as an albatross around the neck for the non-resident e-commerce players^[1]. With an increase in compliance burden and potential increase of costs, many of the e-commerce players consider unilateral measures taken by India as a deterrent to an effective business model. Equally as aggrieved as the e-commerce players, are Countries where these e-commerce operators reside, as they are now being asked to share the taxing right over these ecommerce players as a part of Global solution formulated by OECD. On the contrary, it has proved to be a blessing for Indian Taxman.

The inspiration for India's measures is most certainly the BEPS Action Plan 1 and discussions in the OECD surrounding effective ways of introducing tax measures for the digital businesses. The peculiarity of these businesses in earning millions of revenues without any physical presence has certainly been a matter of concern for countries with large customer or user base. Modern ways of doing business probably needs modern ways of taxing and all these measures are India's response to the changing times. It may be noted that several other countries have also introduced similar unilateral measures to tax these businesses.The expectation is that these measures are only interim, till the time a Global consensus is built for taxing digital businesses, through new nexus and profit attribution rules.

B. Equalisation Levy

Brief Background

The levy was initially introduced by the Finance Act, 2016 (2016 Levy) to tax certain services and recently its scope has been enhanced by amendments made to the aforesaid Act^[2] (2020 Levy) to cover certain other transactions as well. It is important to know that this levy is not through the Income Tax law, rather through the Finance Act, 2016. Further, India's stand is that the levy is not a levy on income rather, it is a levy on certain specified services and transactions.

Under the 2016 levy, equalisation levy of 6% is required to be deducted by service recipient in India on certain services availed from a non-resident service provider (of value above INR.1 lakh). The services covered within its ambit are online advertisement, any provision for digital advertising space, or any other facility, or service for the purpose of online advertisement. This levy was not intended to tap the B2C segments, rather only the B2B transactions.

Under the 2020 levy, implemented from 01 April 2020, a levy of 2% has been imposed on the e-commerce operator who receives any consideration for online sale of goods or services, owned or facilated by it (greater than INR 2 Cr in aggregate) from:

i. An Indian Resident;

ii. A person using Indian IP Address for buying such supplies or services;

iii. Non-resident - only in the following cases:

• Sale of advertisement - targeting an Indian Resident or Indian IP User

• Sale of data - collected from an Indian Resident or Indian IP User

Implication

Availablity of tax credits:

In general, non-residents working in or with India believe that even if they pay taxes in India, they would get credit for the same in their country of residence wherever the said country has entered into a double taxation.

The background to the levy and its elements may have an essence of a direct tax in that it has borrowed certain provisions of Income tax for administering the levy, it has exempted entities having permanent establishment from the levy and amounts subject to this levy are exempted from income tax as well. However, considering that the levy has been introduced, not under the Income Tax law as tax on income, rather as an independent levy under a separate legislation; India is expected to take a position that the levy is not in the nature of tax on income. In fact, if it is shown to be a tax on income, then the non-resident may even challenge the levy on the ground that business income is not taxable in India in the absence of Permanent Establishment as understood in the relevant Tax Treaty. Thus, availablity of credit in the residence country is going to be subject to a lot of disputes. Certainly, this results in an increase in overall costs of undertaking such transactions.

Compliance and recovery of taxes?

Considering that the levy is on non-residents, a question can arise as to how Indian Tax authorities will ensure its compliance by the non-residents. Presently, no definite answer is there in the recently implemented levy. However, taking cue from the BEPS Action Plan 1, Indian Taxman may come up with simplified registration mechanism (similar to taxing OIDR services in GST). Under this, non-resident e-commerce operator may be required to take registration in India for discharging equalisation levy liability, through a simplified mechanism. It is quite likely that the non-residents may be asked to appoint representatives in India who may then be responsible for complying with the Indian law on behalf of the non-resident.

If a non-resident complies with the provisions, then it is a smooth sail. However, what if a non-resident does not comply with the provisions? The recovery provisions borrowed from the Income Tax law could come to the rescue of the Indian Taxman. It is likely that the subsidiary or other group companies of such non-residents in India and the customer of the non-resident in India, in a B2C transaction, could be possibly be dragged into the recovery proceedings one way or the other.

C. Significant Economic Presence

The concept of SEP is also one of the outcome of the BEPS Action Plan 1. The objective of introducing this concept is to develop a nexus for taxing non-residents who do not have any physical presence in the countries where customer or users are situated. The Action Plan suggested that such nexus can be created based on factors, such as revenue, digital presence, and number of users.

India, taking cue from the Action Plan, introduced similar provision in its domestic law. However, in the recent Finance Act, 2020, its applicability has been deferred to AY 2022-23. The deferment is mainly to wait for the final report from the OECD, which is expected to come up with a unified approach for taxing digital economy by December 2020.

Now given the situation of pandemic, the wait may last longer.
Once SEP is implemented in India, India's right to tax digital presence will be enshrined in its domestic laws. However, in most scenarios, this unilateral change will not become functional till corresponding changes are brought in the tax-treaties.

Accordingly, as far as the concept of SEP is concerned, with its deferment, it would not have any impact on the e-commerce players in the near future. However, once it is enacted, it may even prove to be benevolent for the e-commerce players. This is because, it would operate as a tax on income and the non-residents will be eligible to avail tax-treaty benefit. The deferment gives time to the ecommerce players to assess the tax risk in their business models and keep pace with the changes.

D. Profit Attribution related measures

Yet again the captioned measure is one of the outcome of the Action Plan 1. This measure was suggested to complement the nexus test established through SEP.

India has proposed two measures in this respect.

Firstly, the scope of income attributable to Indian operations (in case business connection of non-resident is established), has been widened to include incomes, such as those arising from sale of advertisement targeting the Indian customers. The change is applicable for FY 2020-21. This change, however, is not expected to have a major implication, as no similar change has been brought in the tax-treaties entered into by India. Accordingly, a non-resident eligible to claim benefit of tax-treaty, will continue to be taxable only on the profits attributable to business operations carried out in India.

Second measure is change in the profit attribution rules ('PAR'). India, in April 2019 issued a Public Consultation document for proposing changes in existing rules for profit attribution to PE. No final document has been issued in this respect. So the rules are presently not applicable.

In the consultation document, Indian Taxman has proposed to attribute profit based on a Fractional Apportionment Approach, which is a formula based approach. This is one of the two approaches discussedf in the Action Plan 1. This approach seeks to attribute higher profits to the jurisdiction where customers or users are located. The traditional arm's length principle is proposed to be applied only where a PE caters to supply side factors, such as back office operations, procurement of goods etc.

The rules would help allocate profit where SEP of a non-resident is established. Also, these rules once implemented, will have significant impact on the traditional businesses as well. For instance, in a case where a PE of a non-resident happens to be a sales agent, greater profit would be attributable to the PE under the new approach.

One has to wait and see, whether India enacts these rules before enacting SEP, i.e., before AY 2022-23 or simultaneously. Also, with no corresponding change in tax-treaties, whether one can still apply the traditional arm's length approach or whether one has to compulsorily abide by the new rules will be an interesting point to delve upon.
E. Tax Deduction at Source - Introduction of Section 194O

By the recent Finance Act 2020, a new tax withholding provision has been introduced in the Indian Income Tax Act. According to the said provision, an e-commerce operator, facilitating sale of goods or services for an Indian resident (referred to as e-commerce participant), through its digital platform, is required to deduct tax on the payment made to the e-commerce participant. The tax is required to be deducted at the rate of 2% on the gross value of sale consideration, at the time of remitting money to e-commercce participant.

The above provisions would increase the administrative burden of the e-commerce operators and would also result in blockage of funds for the e-commerce participants.

Whether the new provision seeks to cover non-resident e-commerce operator as well? Seeing the quantum of amendments made for non-resident e-commerce operator, one may see it as a tool introduced by Indian Taxman, to gather information about such non-resident e-commerce operator.

However, whether the non-resident e-commerce operator can at all be made to comply with Indian withholding tax law ?

The provision is silent on the residential status of the e-commerce operator, accordingly, it can be said that it covers non-resident as well. However, in past, similar question had arisen in case of other TDS provisions. In those provisions, responsibility to deduct tax has been casted on 'any person' making payment. The Courts have held that 'any person' would mean residents who have tax presence in India. Applying the same rationale to Section 194-O, one may take a position that non-resident e-commerce operator should not be obligated to deduct tax. However, it is necessary that a clarification in this respect is issued by Indian Taxman to avoid disputes.

Essence of discussion

As can be seen, India has taken all the possible measures to tax non-resident e-commerce companies and is expected to take more measures in future. The intent of the Taxman seems to be clear. With the modernisation of businesses, they also want to modernise the taxing provisions, so that tax is paid where value is created.

(Views expressed are strictly personal)

[1] The new equalization levy is imposed on non-resident e-commerce operators.

[2] These amendments were made to the Finance Act, 2020 by the Finance Act 2016.