Delivering online services or education courses in India? You’re probably subject to a new ‘Digital Tax’!
In 2015, a number of countries across the globe agreed on various measures to curb tax planning by multi-national corporations. India was quick to borrow a tax termed as Equalisation Levy (‘EL’) and introduced a 6% EL charge on specific cross-border services such as online advertisements. Even though 6% of EL was introduced in 2016, a host of online services and business models were outside the scope of EL.
Due to the increasing use of technology in business, from April 2020, the scope of EL has been expanded to cover almost all types of international online transactions. Now, a 2% EL is leviable on consideration received by foreign e-commerce operators from e-commerce supply or services transactions conducted with Indian residents, as well as with non-residents in certain cases. EL is currently not applicable if sales of the e-commerce operator from such supplies or services is less than INR 20 million (USD 250,000) during the financial year (April 01 – March 31).
6% EL continues to apply on services which were earlier covered under EL.
This announcement becomes even more relevant in the times of COVID-19, where most organisations are moving to online models of delivery, especially for cross-border transactions.
What is covered under the EL tax regime?
The definition of foreign ‘e-commerce operator’ and ‘e-commerce supply or services’ is very wide and could cover all types of digital transactions and services. The same will impact all forms of businesses including e-commerce, media streaming, online travel portals, technology, and software solution providers.
Considering the far-reaching impact, even international education services are not untouched by this provision. In our view, below-mentioned services provided by foreign universities could be covered under the scope of EL:
- Online courses to Indian residents (students, executives, teachers).
- Online courses as a temporary measure such as in the current COVID-19 related restrictions.
- Where only a part of the total course is online, while the rest is to be conducted through in-person classes.
- Downloadable (for a fee) research papers through websites.
What are the compliance requirements? Any practical challenges?
While applicable EL can be collected from service recipients, the onus to deposit EL (on a quarterly basis) with the Government has been put on e-commerce operators. Delay in payment would attract interest (@1% p.m.) and penal consequences.
In addition to the above, e-commerce operators will also have to complete an annual filing by June 30th following the close of the financial year (April to March).
The provision as it stands today poses a number of practical and technical challenges on the businesses. It was expected that the Government will come out with some clarification on the scope of the levy. However, even after 7 months of enactment, no clarification has been issued. Further, based on media reports, tech giants such as Netflix, Google, Adobe and Apple have paid this levy in India.
In our view, the possibility of Government issuing any clarification in future is remote and Organizations who are offering online services to India residents should ask their tax advisors to review their product offerings in order to determine the applicability of levy.
In the next section, we have tried to answer some of the frequently asked questions on this new levy.
Frequently Asked Questions
1. Is my business model covered within the definition of an e-commerce operator?
The definition of e-commerce supply or service is very wide. Where the supply or provision of services is happening online, there is a large possibility that EL is applicable to such supply/service and your business should be classified as an e-commerce operator.
2. What services/supplies are covered within this levy?
All kinds of services or supplies being rendered through online mode. For instance:
- Online education;
- Sale of goods/services through online marketplaces owned by other service providers;
- Sale of goods/services through e-portals;
- Online streaming; and
- Offering software or research papers for download through online portals.
The above are only examples where EL may be applicable. As said earlier, the definition may cover within its ambit various kind of other online transactions as well.
3. Can this levy be recovered from the recipient of the service?
Yes, the cost of the EL can be passed on to service recipients. However, the same will increase costs in the hands of the end-consumer.
4. How will an organisation outside India pay this levy?
The Government has released the form through which payment of levy can be done. As the levy cannot be remitted directly into the Government coffers from a bank account outside India, the levy can be paid in either of the below manner:
- Agree with a consultant to pay levy on your behalf through a local bank account;
- Check with your bankers who has a network branch in India, if they can assist with deposit of the levy.
5. Will any registration be required under Indian law?
The E-commerce operator will have to register under the local Income Tax regulations, i.e. it will have to apply for a Permanent Account Number (PAN) in India.
6. How to determine if the consumers is a resident in India or not?
Organisations will have to do changes in their data capture methodology so as to ask consumers to declare their residential status before an order can be placed. It will be good to start a dialogue with technology teams internally along with your advisors.
7. How to capture if the IP address is located in India?
Technically it is possible to determine the location of an IP address. It will be good to start a dialogue with technology teams internally along with your advisors.
8. Which other countries have introduced similar taxes/levy?
Many countries have introduced unilateral measures to tax digital transactions. Some of the large economies which have introduced such taxes/levy are Australia, the European Union, Japan, Russia, Singapore, etc.
9. Is this a temporary measure till a global consensus is reached on digital tax?
There is no assurance that this is a temporary measure. As per a recent announcement by OECD, the target deadline for arriving global consensus on taxation of digital economy has been shifted to mid-2021. The delay in arriving at a global consensus will push many economies like India to take unilateral measures.
10. Are E-commerce operators covered under this Levy required to undertake any filing in India?
The E-Commerce operators required to pay the levy need to do an annual filing in the prescribed form. The form requires quarterly reporting of amount on which Equalisation levy is payable and the detail of payment of levy.
11. If I have a group entity in India through which the online services are rendered. Will levy cover such arrangements?
Where the Indian entity makes payments against such online services offered by them, EL will be applicable.
12. My university is offering students the option to attend the fall semester of our programme online. The fee for the online semester is $2,000. The total programme fee is $12,000 (the fee for the other two semesters is $5,000 each), which are to be held through physical classes. Will EL be applicable?
There is no clarification yet on how the levy will apply where a part of service is online and another part is offline. However, it is possible that EL should be applicable to the fee pertaining to the online semester only. Justification may be required by tax authorities for the difference in fee for online v/s in-person semester model.
13. My university offers a 3-year degree programme for Indian students. The fee is $1,000 per year payable in a half-yearly installment of $500. How will the EL apply?
EL Levy is applicable to the consideration received / receivable during the financial year (April to March).
14. My university wants to launch a one-year master’s course in education leadership for Indian teachers with around 50 partner schools across India. It is expected that 200 nominations will be received. The fee will be $3,000 for the course. My university will offer each school one full scholarship. Also, some partner schools who have helped in the development and marketing will each get 5 % of the income generated from the course. Will EL be applicable?
The levy is applicable to the consideration received during the financial year. Thus, where one scholarship is provided to each school, then consideration should be only for 150 registrations, and levy should be applicable to only those. The provision does not provide for the reduction of any directly – related expenses. The levy is applicable to the gross amount received.
- The above is a general perspective of the recently introduced provision and should not be construed as tax advice.
- Organisations are advised to reach out to us to assess the applicability of this levy on their respective business models.
Last updated on: 30 October 2020