Digital tax: India’s Equalisation Levy and your international transactions
For many businesses, COVID-19 has been a trigger for developing or revising international strategies, with new markets and efficiencies being found in other countries: and India is consistently on the radar as one of the world’s largest economies.
Australia sees India as a growth partner for our key industries – with trade and investments expected to grow significantly – largely due to the sheer size of consumers and markets that can be accessed via the digital space. Australian and other international businesses operating in digital or e-commerce marketplaces targeting Indian investment or consumers are now captured by an extension to India’s Equalisation Levy (EL).
Originally implemented in 2016 with a relatively limited scope, the expanded EL now sees non-resident e-commerce operators liable to pay the EL on the consideration received for sale of or facilitation of sale of goods and/or services. The EL is payable by e-commerce operators at 2 per cent of the above consideration with few exceptions. No further tax would be payable by the e-commerce operator in India once the transaction is subject to the EL.
India together with a number of other countries have unilaterally implemented such taxes on gross revenues of e-commerce MNCs ahead of a global approach being worked on by the OECD. The OECD is concerned the proliferation of such unilateral taxes on e-commerce will trigger tax disputes and heighten trade tensions, damaging an already severely impacted global economy. The OECD therefore considers a multilateral solution based on the work of its 137 member countries as clearly the best way forward.
What transactions are captured by the expanded Equalisation Levy?
The EL is broadly triggered from 1 April 2020 when a sale is made to:
- A resident of India;
- A person who buys such goods/services using an IP address located in India;
- A non-resident of India in relation to:
- the sale of advertising aimed at Indian customers or one who accesses the advertisement through an Indian IP address; or
- the sale of data, collected from an Indian resident or a person who uses an Indian IP address.
What industries are affected by the EL?
The expanded levy is likely to impact a wide range of businesses and industries, where they operate in the digital space or e-commerce market place and undertake transactions connected with India.
This can be everything from online retail, online hotel and tourism bookings, air ticketing, cloud computing and software, online managed services, online entertainment, video streaming and gaming platforms, online calling and videoconferencing, online courses, e-books and e-journal/e-paper subscriptions.
The complexities businesses must navigate
Given its wide scope and the number of businesses potentially captured, the expansion of the EL has raised several challenges around coverage, classification, computation and compliance.
Businesses must ensure they are complying with the new EL laws, while avoiding unnecessary tax duplication or miscalculations that can lead to penalties.
Some common challenges include:
- understanding the interplay between the EL and regular tax on royalty/fees for technical services transactions;
- risk of the EL being applicable to intra-group transactions;
- undefined terms such as the online provision of service and platform etc which remain open for interpretation;
- applicability of the EL on gross or net amount of consideration in certain situations;
- lack of clarity on coverage of transactions relating to sale of advertisements, sale of data, etc. to non-resident customers; and
- lack of clarity on a refund mechanism.
For Australian e-commerce businesses captured by the expanded EL, the question remains as to whether a tax credit will be allowable under either the tax treaty between India and Australia or our domestic tax provisions.
Australia and India – local expertise at both ends of your transaction
The growth opportunities India provides Australian and international organisations is significant, and potentially business-changing. But the tax obligations for doing business in India can be complex and varies depending on your industry, operations and business model. By working with our international tax experts at Grant Thornton, you access a global network that brings together expertise on the ground at both ends of your transaction – but via a single contact point.
We are helping clients to understand the full picture of what the extended EL means for their business. Get in touch with the team.