Equalization levy & TDS on e commerce

Equalisation Levy
&
TDS on e-commerce
businesses

Content
A. Equalisation Levy
 Background & Timeline
 Development by other Countries
 Key Takeaway of report by Committee on Taxation of E-commerce
 Introduction in India – Finance Act 2016
 Some Relevant Considerations
 Equalisation Levy 2.0 – E-commerce supply
 Relevant Considerations on EQ Levy 2.0
 Interplay of SEP & Equalisation Levy
 Bird’s Eye View – EQ Levy 1.0 vs 2.0
 Issues unresolved on EQ Levy 2.0

Content
B. TDS on e-commerce – Section 194-O
 Background
 e-commerce business
 Streams of revenue
 The e-commerce transaction flow
 TDS on e-commerce transaction
 Key Insights on Sec 194-O
 Interplay between EQ Levy 2.0 & Sec 194-O

Rationale for introduction
OECD published 15 action
plans.
Action Plan 1 specifically
dealt with tax challenges of
digital economy
Ability of MNCs to avoid
taxes in source jurisdiction
poses major concern for
countries like India following
source-based taxation
Evolution of new business
models in digital economy
results in tax challenges in
terms of determining nexus,
characterization of income
etc
Limitation of existing PE
rules and lack of tax
neutrality – put constraints
in development of Indian
digital industry
To address these issues,
OECD in its final report on
Action Plan 1 identified three
plausible options
Option 1
Nexus based on significant
economic presence
Option 2
Withholding tax
Option 3
Equalisation levy
First two options may be
ineffective due to treaty
override
Distress regarding
avoidance of taxes by MNCs
in economies from where
they derive profits – resulted
in adoption of BEPS project

Constitution of
Committee on
taxation of
e-commerce by CG
and issuance of its
Report
February
2016
September
2015
February
2016
September
2013
July 2013 May 2016
Finance Act,
2016
introduced
Equalisation
levy on
specified
services
Equalisation levy
made effective
wef from June 1,
2016 and
notification of
Equalisation Levy
Rules, 2016
Issuance of final
report by task
force and its
endorsement by
OECD and G-20
countries
Establishment of task
force on digital
economy with
representatives of
OECD, G-20
countries etc
Action plans
detailing
activities of
BEPS project
published by
OECD
Beginning Of The Google Tax Project
March 2020
Finance Act 2020
introduced
Equalisation
Levy on
e-commerce
supply of goods
and services
India was the first country to introduce an equalisation levy
under its domestic tax legislation based on the
recommendations of the committee formed by the Apex Tax
body (CBDT). Globally, nations had attempted to tax the digital
economy through a combination of
anti-avoidance rules and the levy of consumption tax. The
Indian approach, was, however, different as Equalisation Levy
on specified services (introduced in 2016) was in the nature of
final withholding tax without assuming the character of an
income tax

Development by Other
Countries

Development by other countries
Country
Nature of
levy
Response to Action Plan 1
Argentina Withholding
tax
– Introduction of turnover tax withholding system for revenues derived by non-
residents from rendition of online services (ie from use of internet to obtain access
to movies, TV series, games, music and other similar services, when payments
are made to non-residents with credit card or debit card)
– Issuers of credit card /debit card entrusted with the obligation of ‘withholding
agents’
– Rate – 3 percent
– Computation – 3 percent of net price to be withheld at the time of remitting funds
abroad
– Effective from – November 1, 2014
Australia GST – Australian Taxation Office (ATO) has issued guidance on a new law that will apply
GST to international sales of services and digital products
– Triggering point – Sales to Australian customers within a 12 months period is AUD
75,000 or more
– Scope – Digital products/services imported by Australian consumers (applies on
B2C transactions)
– Rate – 10 percent
– Effective from – July 1, 2017

Country Nature of levy Response to Action Plan 1
Brazil Withholding tax
+ Indirect tax
– No effective changes proposed – but formal confirmation on tax treatment on
foreign data centers provided
– Payment by Brazilian residents to foreign companies – for provision of data
centers subject to following taxes:
– Income tax withheld at source
– Contribution to the Economic Domain
– Contributions on Imports
Italy Withholding tax – Proposal countering issues relating to digital economy under consideration:
– New definition of PE deliberation – to cover situations of virtual PE
– Triggering point – NR to have online activities continuously for 6 months or
more, resulting in payments exceeding 5 million Euros/year
– Application of 25 percent withholding tax on B2B and B2C transactions
– Deduction mechanism – directly by financial institutions processing payments
– Effective from – January 1, 2017

Country
Nature of
levy
Response to Action Plan 1
Japan Consumption
tax
– Applicability of Japan consumption tax (JCT) @ 8 percent extended to –
provision of cross border digital services (distribution of e-books via internet,
downloading music or video, use of online software, e-commerce, online
advertisements, consulting services rendered continuously through phone/ email)
– Basis of charge – location of service recipient
– Collection mechanism:
– B2B transactions – Through reverse charge mechanism
– B2C transactions – Foreign service provider to file JCT return and pay JCT
through tax administrators
– Foreign service provider to file JCT return only in such cases where taxable
sales exceeds prescribed threshold of JPY 10 million
United
Kingdom
Diverted
Profits tax
(DPT)
– The levy termed as a “diverted profits tax” whereby taxpayers are hit with a 25
percent levy on profits generated in Britain but “artificially shifted” overseas
– Levy is outside the tax laws and treaty benefits not available
A number of European countries, New Zealand, Korea, South Africa had started taxing digital transactions under their domestic GST laws. These were
earlier not taxable due to these foreign players not having a local presence or due to the fact that the laws being based on Place of Service rules had
limited taxing rights. Italy has passed legislation that requires Italian companies to purchase their Internet ads only from locally registered companies.

Key Takeaway of report
by Committee on
taxation of e-commerce

Key takeaway of Committee report
Applicability of doctrine of updating Construction
This doctrine suggests that in construing any law, interpreter is to presume that Parliament has intended such
law to be applied at any future date in such a way as to give effect to original intention and thus, while
interpreting such law he is allowed to make reasonable allowances for relevant changes that have occurred
since passing of that law, in terms of social conditions, technology, meaning of words and other matters
Lack of tax neutrality between digital and traditional enterprises disrupts existing
market equilibrium
Distortions arising from violation of tax neutrality has adverse impact on business
of these enterprises and on economy resulting in fiscal constraint for
governments
Fiscal shortfalls resulting from lack of tax neutrality compensated by local
residents in the form of additional tax

Key takeaway of Committee report (Cont)
Difference between withholding tax and Equalisation Levy
Withholding tax is
only a mechanism
of collecting taxes,
whereas
‘Equalisation Levy’
is full and final tax
Constitutional
validity of
equalisation levy
Equalisation levy
appears to be in
accordance with
Entries 92C and 97
of the Union List
Non-applicability
of tax treaties on
Equalisation Levy
Equalisation Levy is
imposed on gross
amount of transaction
and not on income
arising from such
transaction
Double taxation
 Concerns regarding double taxation were also acknowledged by Committee – but it was clearly articulated that a
resident country is not precluded from granting relief under its own domestic laws, to avoid such double taxation
 Possibility of reciprocal agreement can be explored in cases, where both India and resident country impose
such levy
Equalisation Levy is applicable irrespective
of whether or not any income arising from
such transaction is taxable in India

Key takeaway of Committee report (Cont)
Modes of deduction
Apart from casting obligation on payer to
deduct Equalisation Levy, deduction by
payment gateway/ authorized foreign
exchange dealer also considered by
Committee - but considering substantial
modification required in existing laws,
rules, regulations etc to make these
modes effective, alternate options were
not recommended
Justification for inserting Chapter VIII
separately – due to inherent difference in
nature ‘Equalisation Levy’ and income
tax; wherein former is levied on gross
consideration of digital transactions and
latter is levied on income
Rationale for inserting
Chapter VIII
Written declaration by non-resident in
prescribed form including Indian PAN or
tax identity number in country of
residence is sufficient
Non-applicability of Equalisation Levy
on non-residents having PE in India
Payee to file annual return of receipts for
specified services, if such receipts
exceed INR 100 million. Tax deducted by
payers to be accepted as final payment
Reporting compliance on Payee

Introduction in India
Finance Act 2016

Equalisation Levy – Finance Act 2016
Introduced as a separate chapter in Finance Act, 2016 (Sec 163 to 180) - not
forming part of the Income-tax Act, 1961
Effective date – June 1, 2016 (vide Notification 37/ 2016 dated May 27, 2016)
Chargeable on consideration received/ receivable by non-resident for specified
services from:
a) Indian resident carrying on business or profession or
b) PE of non-resident
Rate - 6 percent (no mechanism for exemption or a lower rate)
Finance Act, 2016
Brief provisions
Key definitions
– Specified service means "online advertisement, any provision for digital advertising space or any other facility or
service for the purpose of online advertisement and includes any other service as may be notified by the Central
Government in this behalf"
– Equalization levy means “the tax leviable on consideration received or receivable for any specified service under
the provisions of this Chapter”

Equalisation Levy – Finance Act 2016 (Cont.)
Non-
applicability
Non-resident providing specified services has a PE and such services are effectively
connected with that PE; or
Aggregate consideration for specified services in a FY is up to INR 100,000 (payer wise,
not a standard deduction); or
Payment by Indian resident or PE of non-resident – not for purpose of carrying out
business or profession (covers only B2B, not B2C)
Other Provisions
 Section 10(50) of the Act provides exemption for income on which Equalisation Levy is chargeable
 Section 40(a)(ib) of the Act provides for disallowance of expenditure, if payer fails to deduct and deposit
Equalisation Levy on or before the due date specified under section 139(1) of the Act
 Equalization levy deducted in subsequent year or deducted during the PY but paid after due date specified under
Section 139(1) – allowed as deduction in the year of payment

Other Provisions - Compliances
 Equalization levy to paid to Central Govt by 7th day of the following month in which it is deducted
 Consequences for delay in payment – Interest @1 percent for every month or part of a month
 Penal consequences for:
 Failure to deduct equalisation levy – Penalty equivalent to amount of Equalisation Levy
 Failure to pay equalisation levy after deducting – Penalty at INR 1,000/ day till the failure continues
(maximum penalty equivalent to amount of Equalisation Levy)
 Statement of 'specified services’ to be filed by payer annually in accordance with Equalisation Levy
Rules, 2016
 Belated/ Revised statement can be filed within 2 years from the end of FY in which specified services are
provided
 Processing of statement through intimation – not later than 1 year from the end of FY in which such
statement is filed
 Intimation can be amended by the AO to rectify mistake apparent from record – within 1 year from the
end of FY in which such statement was issued
 Penalty @ INR 100/day for failure in filing such statement
 Punishment for false statement – Imprisonment of upto 3 years + Fine

Other Provisions - Litigation
 Appeal mechanism provided to payer against penalty imposed under Chapter VIII:
 CIT(A)* – Within 30 days from the receipt of AO’s order imposing penalty
 Tribunal* – Within 60 days from the receipt of CIT(A)’s order imposing penalty
 Appeal before CIT(A) only against an order imposing penalty
 No right of appeal against intimation or rectification order – Writ could be the only remedy in such cases
 Powers vested on the Commissioner of Income-tax under Section 263 or Section 264 of IT Act cannot
be exercised in respect of Equalisation Levy
 Prosecution proceedings not be instituted – without the previous sanction of Chief Commissioner of
Income-tax
*Form of appeal before CIT(A) and ITAT prescribed under Equalisation Levy Rules, 2016

Rules summarized briefly:
 Rounding off consideration for specified services, equalisation levy, interest etc – Nearest multiple of
INR 10 (Rule 3)
 Statement of specified services to be filed in Form No 1, incorporating details relating to (Rule 5)
 Name, address, PAN of payer and payee (if available)
 Financial year, amount of consideration for specified services
 Amount of equalisation levy deductible and deducted
 Details of payment of such levy, interest to CG
 Due date for statement of specified services – on or before June 30 immediately following the FY
(Rule 5)
 Payer to file statement of specified services within 30 days of date of service of notice, if no
statement filed within due date (Rule 6)
 Intimation under section 168(1) of Finance Act, 2016 to be deemed to be notice of demand (Rule 7)
Equalisation Levy Rules, 2016

Some Relevant Considerations
Nature of equalisation levy in connection with Income Tax
 Introduced as separate chapter in Finance Act, 2016 and not under Income-tax Act, 1961
 Denial of the treaty benefits available under IT Act or avoid any disputes related to creation of business connection or
characterisation issues (establishing payments to be in the nature of Royalty/ FTS)
 Since, NR are made liable to pay Equalisation Levy from the income earned, it is inconsistent with the Non-
Discrimination clause of India’s tax treaties with other countries
 Section 164(d) of Finance Act, 2016 defines equalisation levy as “tax leviable on consideration received or receivable
for any specified service under the provisions of this Chapter”
 Section 164(j) of Finance Act, 2016 reads as “words and expressions used but not defined in this Chapter and
defined in the Income-tax Act, or the rules made thereunder, shall have the meanings respectively assigned to them
in that Act”
 Section 2(43) of Act defines the term tax as to mean “income tax chargeable under the provisions of this Act”
 Committee’s observation on constitutional validity – makes reference to Entries 92C and 97 of the Union List
 Placement of Section 40(a)(ib): Since, Equalisation Levy is a tax other than income-tax, the same should have been
covered within the provisions of Section 43B(a)
 This is possibly because Section 40(a)(ii) provides that any sum paid on account of tax on profits or gains shall be
disallowed. The new sub-clause (ib) seeks to create an exception to Section 40(a)(ii). It therefore is necessary to
insert the new provision within Section 40(a) itself. Consequently, the income tax and Equalisation Levy do not
appear to be different.

Constitutional validity and other aspects
 Seventh Schedule of Constitution of India prescribes Union, Sate and Concurrent List, the subject matter of
which can only be legislated by CG, SG or both:
 Union List, Entry 82 – Taxes on income other than agricultural income
 Union List, Entry 92C –Taxes on services (not enforced yet)
 Union List. Entry 97 – Residual category
 State List, Entry 55 – Taxes on advertisements other than advertisements published in the
newspapers and advertisements broadcast by radio or television
 Considering the definition of equalisation levy in clause 161(d) – these services are likely fall under Entry
55 of State List creating ambiguity, whether Parliament has power to legislate matters covered in State List
 Power of Central Govt to expand definition of specified services via Notification - Whether allowed under
delegated legislation?
 Reference to service tax laws, wherein scope of services are usually expanded during annual budget
making exercise

Power of Parliament to unilaterally override tax treaties
 Disregarded principles of Vienna convention
 Breach of non-resident taxpayer’s right in invoking favorable provisions under tax treaties – exemption
provided under Section 10(50) of the IT Act
 Relevance of Article 51 of Constitution of India – which endeavors States to foster respect for international
law and treaty obligations
 Past precedents:
 Amendment in section 90 – which abridged non-resident taxpayer’s right in challenging differential tax
rate under non-discrimination clause of tax treaties
 Retrospective amendment in the definition of term ‘royalty’ by Finance Act, 2012
Initial classification and subsequent classification of transaction
Significant issues may arise in cases where at the inception a transaction is subject to equalisation levy, but
later on in assessment these transactions are re-classified and attributed to PE. No reference in Chapter VIII of
Chapter XIX of the IT Act dealing with refunds – So Equalisation Levy paid in above situation cannot be
claimed as ‘refund’

Double taxation dilemma and availability of FTC
 Introduction of Equalisation levy leads to a situation of double taxation – where India and resident country
both tax same amount of consideration received by non-resident service provider
 Lack of clarity on nature of Equalisation levy being ‘income tax’, further exaggerates issues relating to FTC
 Revenue Secretary’s confirmation in an interview for Business Today Magazine (Issue dated 5 June 2016)
that Equalisation levy is a tax on income of a foreign enterprise
 Para 2 of Article 2 of India – US treaty covers ‘identical or substantially similar taxes’. Interesting to see how
the US IRS or tax authorities of other countries which has similar language in the treaty considers
Equalisation Levy for allowing tax credit
 Applying the principles of ‘substance over form’, courts may treat this levy as income tax for the purpose of
treaty benefits
 Otherwise leads to a situation of treaty dodging, considered impermissible as held by the Indian courts
 No refund mechanism provided either in Act or Chapter VIII – Resulting in dead loss of Equalisation levy
paid in India
 Feasibility of Committee’s recommendations on double taxation
 Practical issues relating to availability of FTC especially in cases, where other countries impose GST or
consumption tax on digital transactions and not income tax or Equalisation levy
If companies think this amounts to excessive tax, they can always set up a PE in India and pay tax as other
businesses do – Risk is profit attribution then!

Non-alignment of equalisation levy with BEPS recommendation
No recommendation of equalisation levy in final report on action plan 1 – although memorandum to
Finance Bill, 2016 clearly specified so
Structures proposed in final BEPS report – to cover situations of untaxed income or taxation at very
low rate tax (but it is levied in all cases irrespective of whether income from such transaction is
taxable or not)
Application in case of significant economic presence – Nevertheless Chapter VIII applies
irrespective of existence of such presence, subject to a upper limit of INR 0.1 million
To be imposed only in case of disparity – however in reality no such disparity exists (as domestic
taxpayers pay income tax and service tax on these transactions vis-à-vis non-resident taxpayers
pays income tax in their resident country along with service tax in India)

Are these payments
excluded?
Payments made by
companies for job
recruitments (as it is B2B
transaction but at the
same time intent of
advertisement is non-
commercial in nature)
Payments made
by individuals for
posting blogs, job
seekers etc
Payments made to
intermediary
companies for
online
advertisements
Payments made to
foreign media
companies
publishing news
item about
updates etc
Amounts paid to
e-commerce
companies for
listing the products
sold by merchants
online
Spends by the
Government for
advertising pet
schemes, election
campaigns etc

High cost of doing business in India - Impact on start ups and SMEs
 Aimed at the big boys, Google tax ended up hurting the small and vulnerable
 Burnt a hole in the cash-crunched small pockets of Indian startups
 To cope up this, taxpayers need to re-negotiate their existing contracts which can result in additional
issues relating to bearing of cost, compliance burden, grossing up etc
 Grossed up Equalization Levy is a direct cost as the levy is not creditable unlike GST
 So while the government does get an extra inflow of tax revenue, Indian SMEs are impacted negatively
 Computation mechanism – Clarity provided in Committee report, chargeable on amount received
excluding indirect taxes / levies paid in India

Others open areas
 Can the foreign company apply for an Advance Ruling?
 Requirement to file income tax returns as full / final tax has been paid?
 Interplay between Section 163(3) and Section 165(1)
 Interplay between Section 163(3), 164(d) and 165(1) – whether Equalisation Levy is applicable on
consideration in kind or discharged by way of adjustment?
 How to determine ‘non-resident’ status at the time of payment? Foreign company whose POEM is in India
will be ‘resident’ and consequently Equalisation Levy is not chargeable for specified services provided by
such company – No PE declaration is a must
 Deduction and payment of Equalisation Levy – not a condition precedent for exemption under
Section 10(50) of the IT Act
 Inclusive definition of PE under Chapter VIII – Sec 164(g) - Whether other forms of PE like Construction
PE, Supervisory PE, DAPE, Service PE are also covered?
 Whether exceptions to PE status like having a liaison office, preparatory or auxiliary work also covered?
 Principles of grossing up under Section 195A of the IT Act missing in Chapter VIII – though mathematically
possible
 If payer pays 6 percent out of pocket – whether requirement of Chapter VIII, Section 40(ib) of IT Act
satisfied?

Others open areas
 Whether Equalisation Levy paid out of pocket eligible for deduction under Section 37 of the IT Act?
 Page 101 of Equalisation Levy report contemplates deduction of Equalisation Levy for a NR as a
business expenditure
 TDS paid out of pocket - eligible for deduction - ACIT vs Bobcards Ltd [2013] 29 taxmann.com 234
(Mumbai ITAT)/ CIT vs Standard Polygraph Machines P Ltd [2002] 124 Taxman 669 (Mad) - Whether
same principles could be extended to payment of Equalisation Levy?
 Liability to deduct and pay Equalisation Levy is a statutory duty - expended wholly and exclusively for
the purpose of business or profession. The fact that the levy is attracted only if the specified services
are procured for the purposes of carrying out business or profession further substantiates this view.
 Provisions of transfer pricing and general anti-avoidance rules to apply to such transactions?
 Whether the threshold of INR 0.1 million to be examined from vendor or consumer perspective?
 Whether the liability to deduct equalisation levy would arise on date of invoice, on due date or on the date
of actual payment?
 Cancellation of amount payable - implications?

Equalisation Levy 2.0 -
E-commerce

Equalisation Levy – Finance Act 2020
Broadening the scope, provisions introduced by the Finance Act 2020 are in addition to the
existing Equalisation Levy on specified services
Chargeable on consideration received/ receivable by non-resident e-commerce operator
for e-commerce supply of goods or services:
i. Online sale of goods owned by e-commerce operator or services provided by operator
ii. Online sale of goods or provision of services facilitated by the operator
iii. Any combination of the above
Rate – 6 percent for specified services (Finance Act 2016) – Withholding Tax
Rate – 2 percent for e-commerce supply (Finance Act 2020) – Liability of recipient
Finance Act, 2020
Brief provisions
Equalisation Levy is payable by the recipient of such consideration for e-commerce supply,
ie e-commerce operator. This levy is not in the form of withholding of tax
E-commerce supply by non-resident e-commerce operator to –
i. Person resident in India
ii. Non-resident in the specified circumstances as referred in section 165A(3)
iii. Person who buys goods or services or both using internet protocol (“IP”) address
located in India (instances such as NR using Indian Wi-Fi could get covered)
Applicable from
April 1, 2020

Non-applicability
Non-resident e-commerce operator providing specified services has a PE and such
services are effectively connected with that PE; or
Where equalization levy is leviable u/s 165, ie equalisation levy as per Finance Act 2016; or
Sales, Turnover or Gross Receipts of e-commerce operator, from such e-commerce supply
is less than INR 20 million in the preceding FY
Key definitions
Specified circumstances
Sale of advertisement, which targets customers, resident in India or
customers who accesses the advertisement through IP address
located in India
Sale of data, collected from a person who is resident in India or from
person who uses IP address located in India
Quite
substantial
in reach
e-commerce operators
Non-resident who owns, operates or manages digital or electronic facility or
platform for online sale of goods or online provision of services or both

EQ levy on e-commerce supply or services
e-commerce supply or services
Person resident in India
Person who buys using
IP address in India
Non-resident in
specified circumstances
Non resident e-commerce
operator

Other Provisions
– Liability of payment of the Equalisation Levy chargeable on e-commerce supply is on the non-resident
e-commerce operator and the same has to be remitted quarterly to the Indian Revenue as per below
timelines
Quarter ending Due Date
30th June 7th July
30th September 7th October
31st December 7th January
31st March 31st March
– Finance Act 2016 provisions – relating to filing of annual statement, interest and penalty for non-deduction or
delay in remitting the equalization levy, rectification of mistakes, litigation proceedings and others are aligned
and the same shall be applicable for this levy as well
– Section 10(50) is also amended to exempt income arising from e-commerce supply or services chargeable
to equalisation levy applicable from April 1, 2021

Relevant Considerations on EQ Levy 2.0
Taxable amount – Gross amount
vs commission income
– Ambit of new equalisation levy covers
‘online sale of goods or provision of
services facilitated by the operator’
– Ambiguity exists on taxable value of
transaction (such as discounts, cash
backs etc) + whether on full
consideration or net commission
income
Sale Platform – not defined
– Neither ‘Online Sale’ nor ‘Online Platform’
defined under the chapter for equalisation
levy
– What actually constitutes online sale?
Does the sale concluded on e-mail
correspondences also make up for
transaction covered under equalisation levy?
Cloud Computing
– EQ levy confronts front end services and
does not intend to embrace back end
digital support services
– However, they are still under the umbrella
of online services provided
– Hence, cloud computing being a
subjective issue is highly litigative
– Guidelines expected in this regard
What if transaction assessed as
Royalty / FTS
– Transactions may be assessed as Royalty /
FTS by the tax officer in tax audit at a later
point in time, ie after payment of EQ levy
– Appropriate guidance concerning the matter
is expected to clear the clouds

Equalisation
Levy and GST
– Equalisation Levy and GST in India are two separate and
independent levies
– No availability of credit under another regime when taxes paid
under one
Relevant Considerations on EQ Levy 2.0
Transactions
covered
under EL
Inter-alia, below transactions are covered under EQ levy
i. B2B transactions
ii. Financial services provided online
iii. Payment gateway/ processing services
iv. One-to-one transactions along with mass access services
– EQ levy on such service shall be apportioned
to India
– Based on number of clicks, likes, display, etc
– Appropriate guidelines expected on these lines
Advertisement
targeting global
audience

Interplay of SEP &
Equalisation Levy

Significant Economic Presence (SEP)
– Expands the scope of income of a non-resident which accrues or arises in India that results in a "business
connection" in India for that non-resident
– Resulting income, attributable to SEP, taxable in India
– Transactions/ activities to constitute SEP in India, whether or not the non-resident has a residence or place
of business in India, or renders services in India, or the agreement for such transactions or activities is
entered in India
Transaction in respect of any goods, services or
property carried out by a foreign enterprise in
India, including provision of download of data
or software in India, if payment exceeds beyond
a prescribed limit
Systematic and continuous soliciting of its
business activities or engaging in interaction with
such number of users as may be prescribed, in
India through digital means
or
Threshold of
"Revenue" and
"Users" not
prescribed yet
Interplay with
current 6
percent
Equalization
levy (EL)
Cross border
business
profits to
continue to be
taxed as per
existing treaty
rules till
modified
Non-treaty
jurisdictions to
be most
impacted
Significant tax
impact for
overseas
players in
digital
business
space
Terms such as
Goods, Digital
means etc
needs clarity
and Profit
attribution
rules to be
notified

Interplay of SEP and Equalisation Levy
SEP is a concept under the IT Act and equalisation levy is a separate chapter apart from the IT Act
Is there a possibility of
overlapping of the
services covered
under both the
regime?
Trepidation of
double taxation
where tax is levied
under both the
regime on the same
services
Purpose of both regimes is to tax digital economy.
While the scope of SEP is very wide covering every type of digital
services, the ambit of equalisation levy is limited and services can
certainly be unearthed to be taxed under both the regime. SEP was earlier
proposed to be effective from Assessment year 2021-22, but has been
deferred to Assessment Year 2022-23
In spite of the fact that the service might be covered under both the
regime, there cannot be a levy of double taxation owing to -
a. Concept of SEP does not form part of any of India’s tax treaties
or MLI
b. Services on which equalisation levy is chargeable is specifically
exempt from income tax u/s 10(50) of the IT Act and therefore SEP
should not be applicable on such services

Particulars EQ Levy 1.0 EQ Levy 2.0
Trigger for levy in India Non-resident service provider engaged in
providing specified services
 Non-resident e-commerce operator who
owns, operates or manages digital or
electronic facility or platform in connection
with India operations
 Non-resident who sells advertisement to
another non-resident which targets an Indian
resident customer or a customer who
accesses the advertisement through internet
protocol (IP) address located in India
 Non-resident who sells data, collected from
an India resident person or from a person
who uses IP address located in India
Specified services/
transactions on which
levy is applicable
 Online advertisement
 Any provision for digital advertising space
 Any provision of facility or service for
online advertisement
 Any other service which may be notified
later by the central government
 Online sale of goods owned by e-commerce
operator or services provided by operator
 Online sale of goods or provision of services
facilitated by the operator
 Any combination of the above
Rate of levy 6% 2%
Person responsible for
compliance or person
obligated to pay levy in
India
Payer/ Buyer Recipient/ Non-resident e-commerce operator
Bird’s eye view - Equalisation Levy 1.0 vs 2.0

Particulars EQ Levy 1.0 EQ Levy 2.0
Specified persons /
buyers to trigger levy
 Any person resident in India and carrying
on business or profession
 Non-resident having a PE in India
 Any person resident in India
 Any person who buys goods or services or
both using IP address located in India
 Any non-resident in respect of offshore
purchase of advertisement, data as
mentioned above
Exemptions from levy
obligation
 Non-resident has a PE in India and
specified services (as above) are
effectively connected to PE in India
 Aggregate value of consideration for
specified transactions do not exceed INR
0.1 million in a FY
 Where payment is not for the purpose of
carrying out business or profession
 Non-resident e-commerce operator has a PE
in India and e-commerce transaction is
effectively connected to PE in India
 Aggregate value of consideration for
specified transactions do not exceed INR 20
million
 Where Equalisation Levy 1.0 is levied on
services
Exemption from levy of
income tax in India if the
income is subject to
Equalisation levy in India
Yes, service income which is otherwise taxable under income tax would be exempt in the hands
of non-residents in India
Bird’s eye view - Equalisation Levy 1.0 vs 2.0

 Software subscriptions through online modes/ Online subscriptions for games, video, music, ebooks –
whether goods or services – EQ Levy 2.0 applicable?
 Would reseller or distributor of goods/ services be subject to EQ Levy 2.0?
 Can the non-resident e-commerce company claim credit for EQ levy 2.0 paid in India?
 Whether sale of information related to Indian users, congregated by non-resident players through use of
applications/ software in mobile phones/ other e-devices of India based customers be subject to EQ Levy
2.0?
 Refund of EQ levy in case of sales returns, defective supplies etc
 Enforcement by the tax authorities to bring non-resident ecommerce operators under the ambit (tough to
detect operators with no tangible presence in India)
 Sale of advertisement akin to sale of ad space or display of advertisement?
 EQ Levy applicable if aggregate value of consideration for specified transactions do not exceed INR 20
million. If threshold achieved, whether EQ Levy applicable on consideration received before such threshold
is achieved or only on excess of INR 20 million?
 Valuation of user data – methods and approaches
 Determining the residency status of customers in India – Methods? Brightline tests needed
 Tracking IP addresses or location of each customer could be daunting exercise. How will the transactions
using VPN be tracked?
Issues unresolved on EQ Levy 2.0

B. TDS on E-commerce
Section 194-O

Background – TDS on e-commerce
– Indian e-commerce market is expected to grow to US$ 200 Bn by 2026 from US$50 Bn as of 2018
– Growth triggered by internet and smartphone penetration in the country
– Revenue expected to reach US$ 120 Bn by 2020, growing at a annual rate of 51 percent
Market
– e-commerce transactions occurs in B2B, B2C, C2C and C2B models
– Scope of such transactions very wide, spread over various sectors such as online retailers, online
food delivery platforms, car aggregators, online advertising, online bookings, online payments,
money transfers etc
Coverage
TDS Applicable on (a) amount retained by e-commerce portal (commission paid by the supplier) u/s
194H (b) payment made to delivery agents or driver partners u/s 194C (c) warehouse rent, logistics
and storage charges u/s 194I/ 194C (d) advertisements on website and other online platforms u/s
194C/ 194J
Existing
Provisions

Report of the committee set up by the Central Board of Direct Taxes to look into issues of
TDS on e-commerce and aggregators had pointed out various defaults in TDS compliance
by e-commerce operators:
– Tax not deducted by restaurant partners on payment of commission to a online food
delivery operator
– Tax not deducted by online cab operator on amount paid to driver partners
– Online entertainment and event booking platforms not deducting tax on transactions
with various parties where Section 194C/ 194H was clearly applicable
Issues
– Obligation to deduct taxes on payments made to payee, imposed on the payer (subject
to some exclusions)
– Difficult to apply TDS provisions in e-commerce models, as customers/ buyers are
actual payers and not the e-commerce operators
– Practically impossible for payer (customer) to comply with TDS provisions on such
transactions
– TDS provisions not applicable on purchase of goods
Prior to
Budget
2020
Background – TDS on e-commerce (Cont.)

E-commerce businesses
Online
Retailers
Amazon
Flipkart
Snapdeal
Online food
delivery
platforms
Zomato
Swiggy
Grofers
Vehicle
Aggregators
Ola
Uber
Redbus
Online
Advertisers
Google
Facebook
Yahoo
Online
holiday
booking
Trivago
TripAdvisor
MakeMyTrip
Online
entertainment
BookMyShow
Paytm
TicketNew
Online
payments/
wallets
Paytm
CC Avenue
PhonePe
Online
content
YouTube
Netflix
Amazon Prime

Streams of Revenue
`
Sources
of
Revenue
Commission
(Seller
commission)
Logistics
(Delivery
charges)
Rent
(Warehouse rent)
Advertisement
(Online
advertisement)
Convenience
charges
(Internet
handling fee)
Subscription
charges
Advertisement
(Online
advertisement)
Convenience
charges
(Internet handling
fee)
Sec 194H
Sec 194C
Sec 194I/194C
Sec 194J/194C

The e-commerce transaction flow
Royalty, FTS, commission,
rent, shipment/ packaging/
delivery charges
Royalty to authors,
owners or rights etc.
Transaction fees
Advertisement fees
Bank E-commerce
company
E-commerce
participants
Fees paid Fees paid
Suggestion that e‐commerce be subjected to a one‐source rule by
subjecting services, royalties, rents, and sales in electronic commerce to the same source rule has been deliberated
upon widely. Apart from this, it should also include imposition of gross withholding tax on sales/
services provided through electronic means into the
demand jurisdiction. This principle obviously suffers from the infirmity of conferring
the jurisdiction of collecting tax exclusively to the demand jurisdiction providing its
market while excluding other jurisdictions and, as a result, the principle of sharing
the pie gets affected. Besides this, the mode of taxation disturbs the principle of
neutrality and introduces a distinct tax regime for e‐commerce in comparison to non ecommerce module

Illustration
e-commerce
participants
Buyer
e-commerce
operators
Warehouse
₹130
(paid by
customer)
₹10
(Rent)
₹20
(Delivery
charges)
₹85
(after retaining
commission of ₹15)
Sec 194H
Sec 194-I
Sec 194C
Equalisation Levy and Section 194-O are new boys in the town!

Finance Act 2020 has widen the scope of TDS on e-commerce transactions by inserting new
provision (Section 194-O) to levy TDS at the rate of 1 percent on payments made to e-
commerce participants being a resident in India, for sale of goods or services including digital
products, through digital or electronic facility or platform for e-commerce
TDS on e-commerce transactions (Sec 194-O)
e-commerce operator, whether resident or non-resident of India liable to deduct taxes at source
TDS applicable only on resident e-commerce participants
Tax to be deducted at the time of credit or payment (whichever is earlier)
Tax to be deducted on gross amount of sales or services or both
Any payment made directly by purchaser to the participant shall be deemed to have been paid by the
operator and TDS applicable
TDS rate – 5 percent for non-PAN/ non-Aadhaar cases

Exemption from TDS given to individual/ HUF e-commerce participants, where gross amount of sales
through e-commerce operator does not exceed INR 5 lakhs (PAN/ Aadhaar needed)
Transactions dealt under Section 194-O not be liable to TDS under any other provisions of Chapter
XVII-B of Income Tax Act
Provision not applicable to amounts received by an e-commerce operator for hosting advertisements
Amendment shall come into effect from October 1, 2020
e-commerce operators
Any person who owns,
operates or manages digital or
electronic facility or platform for
electronic commerce
e-commerce participant
A person resident in India
selling goods or providing
services or both, including digital
products, through digital or
electronic facility or platform for
electronic commerce
Services
Includes fees for technical and
professional services as defined
in Section 194J
e-commerce operator deemed to be person responsible for paying e-commerce participants
TDS on e-commerce transactions (Sec 194-O)

Key insights on Sec 194-O
No provisions currently to consider issues such as subsequent return of goods by customers/
discount codes/ gift vouchers etc, for computing amount to be subject to TDS. GST laws
specifically provide for reduction of taxable supplies returned
No clarity regarding liability of the person responsible for TDS in cases where multiple e-
commerce operators are involved in transaction such as use of third-party electronic
payment gateways in settlement of e-commerce transaction
Section 194-O does not define ‘gross amount of sale or services or both’ on which taxes are
required to be deducted. Clarity required on inclusions and exclusions from the gross
amount, if any.
Section 194-O applies to only ‘resident’ e-commerce participants and to e-commerce
operators. This implies that foreign operators are required to comply with Indian TDS
provisions even if there is just one such transaction on its platform
Interplay between Section 194-O and Equalisation Levy when supply of goods or provision of
service is made by a resident player through a non-resident

Key insights on Sec 194-O
Sec 206AA provides that if Permanent Account Number (PAN) is not furnished by the payee,
withholding tax rate would be 20 percent (5 percent in case of Sec 194-O) or the rate in force,
whichever is higher
CBDT had notified Rule 114AAA on February 13, 2020 to provide that failure to link Aadhaar
number by March 31, 2020 (now June 30, 2020) shall render PAN, allotted to such person
inoperative
Subsequent to PAN becoming inoperative, it shall be presumed that such person has not
furnished PAN, triggering Sec 206AA provisions [Rule 114AAA(2)]
E-commerce operator needs to ensure that e-commerce participants link their PAN and Aadhaar.
Failure to do so would attract higher TDS. Exposure of interest under Section 201 exist for e-
commerce operator in case right rate of TDS not applied (even under other TDS sections such as
Sec 194C, 194J etc)
Guidelines on Regulation of Payment Aggregators and Payment Gateways introduced by RBI on March
17, 2020, (with effect from April 1, 2020) by virtue of which e-commerce platforms are not allowed to
accept online payments without a licence. Regulations make it clear that money collected from
customers is required to be kept in an escrow account and paid to the seller. No debits can be made
from that account for the purpose of paying TDS as that is not a permissible transaction. This could
create working capital issues for the e-commerce operator

Interplay between EQ Levy 2.0 and Sec 194-O
Seller /
Participant
Buyer / User
e-commerce
operators
Both
Resident
& Non-
resident
in India
Is Seller resident
in India?
No
Applicability of TDS u/s 194-O
No TDS
applicable
TDS
Applicable
Yes
E-commerce operator
Resident / Non-resident?
EQ levy not
applicable
Resident
Non-resident
in India
Non-resident in
the specified
circumstances
Using IP address
located in India
Applicability of EQ Levy
Resident in India
EQ levy applicable at 2
percent

E-commerce Operator Seller Withholding under
Section 194-O
New EQ Levy
applicable?
Resident Non-resident No No
Resident Resident Yes No
Non-resident Resident Yes Yes
Non-resident Non-resident No Yes
Specified circumstances
Sale of advertisement, which targets customers, resident in India or customers who accesses the advertisement
through IP address located in India
Sale of data, collected from a person who is resident in India or from person who uses IP address located in India
It is not free from doubts whether transactions between two non-residents (pure offshore transactions) could
create a nexus with India merely because advertisements target Indian customers. Even under Goods and
Services Tax when online services are provided to customers located in India, there are multiple criteria that
needs to be satisfied for nexus to be established with India. Such criteria has not been mentioned for these
new Equalisation levy provisions except for the mention of IP addresses or that the customer is a resident in
India. Mere accessibility of a website or advertisement is internationally understood to be inadequate to create
taxable nexus in a country and such a view is also supported by decisions of Indian courts as well. Also, even
the sale of data, relating to a person resident in India, between non-residents should not be considered to
having any nexus with India. To that extent, the constitutional validity of new Equalisation Levy provisions may
need to be examined
Interplay between EQ Levy 2.0 and Sec 194-O

Thank you
Sandeep Jhunjhunwala
Director
Nangia Andersen LLP
sandeep.jhunjhunwala@nangia-andersen.com
+91 97401 55469/ +91 80 2228 0999
The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do
not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to
jurisdiction and be subject to change. No warranty or representation, express or implied, is made by us, nor does the Firm accept any
liability with respect to the information and data set forth herein. Distribution hereof does not constitute legal, tax, accounting, investment
or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein.
© 2020 Nangia Andersen LLP. All rights reserved.

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