In New Lockdown Levy on ‘Non-Resident’ Digital Companies, a Novel Tax Adventure

Uncertainties abound in this hurriedly passed tax, which has also now invited scrutiny from the Trump administration.

Stuck at home in the most stringent lockdown and binge-watching Netflix? Or downloading the latest music or book you always wanted to read from Amazon?

The taxman apprehended this trend just a day before the national lockdown and made all such digital consumption dearer.

This year’s Union budget was presented by the finance minister on February 1, 2020, where she delivered the longest ever speech  (a marathon 2 hours 15 minutes). The speech, however, had no mention about a tax that will be introduced and christened as an “equalisation levy”, only on non-resident e-commerce sellers.

This is fine, because the devil always lies in the details. However, the fine print of the Union Finance Bill also had no surprises; there was no such proposal in the Budget.

So, what happened? Firstly, a lot changed between February and the last date of the Budget session (March 23). The world, including India, was waging a war against an insidious novel virus that required stout resistance, crafty planning and most importantly, funds. For the government, it was the most appropriate time to replenish its drying coffers by imposing a tax that was optically not on domestic businesses.

The novel virus led to the hurried introduction of a novel tax in the Finance Bill 2020 that was passed by the Lok Sabha on March 23 without any discussions or deliberations in the well of the houses of the parliament or with relevant corporate stakeholders.

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The government calls it an ‘Equalisation Levy’, which is, in fact, an expansion of an earlier levy known informally as the “Google Tax”. The earlier avatar was to tax the online advertising revenue (at 6%) received from non-resident e-commerce players. The current levy (pegged at 2%) is on all online/digital sale of goods or services by a non-resident to an Indian customer through a digital medium, be it a website or an e-commerce market place. There is nothing in the law that prevents the non-resident sellers to pass on the burden to the consumers, thereby consequently increasing the consumption cost and final bill of the Indian consumer.

Imposing a tax on foreign subjects for taxation (non-residents) is an adventure. The government claims that the levy counterbalances the income tax that is not paid by such non-residents whereas similarly placed resident digital sellers pay income tax in India. This is an assumption as all such non-resident sellers pay corporate tax in their respective country of residence (tax haven excluded). This makes the levy, in essence, a tax on the income of the non-residents received by it from Indian customers.

While India has a nexus and a sovereign right to tax such income as the source originates from India (payments made by Indian consumers), the bilateral agreements India has entered into with the countries from where such non-residents operate refrains it from taxing such non-residents. India can tax such non-residents only when business is transacted through a physical place of business located in India and none of such sellers have a place of business in India.

To wriggle out or obviate the commitments made by India in its bilateral treaties, India has ostensibly termed this levy as a tax other than an income tax and also introduced it not under the Income Tax Act but under a different statute (Finance Act 2016). The only tax, other than an income tax, which perceivably the parliament can levy on online sale of goods and services is a goods and services tax (GST). Interestingly, such online sales by non-residents are already subject to GST in India. The Indian consumer is already bearing the burden of a GST on all such digital consumption.

Parliament has the legislative competence to tax the same transaction twice. However, if the tax is not an income tax, then another GST on the same transaction can only be levied after seeking the approval of the states through the GST Council. The states are constitutionally entitled to a pie of from the Equalisation Levy if it is a GST but the states have remained mute spectators in these times, both in fiscal and legislative matters. The power has been usurped under the garb of disaster management.

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The world is watching this levy very closely. The US Trade Representative Office has decided to launch an investigation by terming the levy as discriminatory against US companies. While the levy is origin neutral and applies to all non-residents irrespective of the country, the impending question that comes to mind is whether the levy is legally sustainable.

The intention of the government is to tax the digital economy based on the economic presence of the digital sellers and not the physical presence. The economic presence lies in India through the presence of the large consumer base that is going digital. More than 65% of the Indian population is below 35 years and the majority has digital access. This intent has to be effectuated within the letter of law. In current form, though the long arm of law has been extended beyond India, it needs to be watched whether the arm can wrap its fingers around the non-resident sellers.

Tushar Jarwal, Partner with DMD Advocates is CA and a lawyer practicing in the Supreme Court and various high courts specialising in direct and indirect taxes.