New Notifications Alter Tax Requirements for Non-Resident E-commerce Companies in India

As e-commerce and digital companies continued to grow in terms of size and customer acquisition, the problem of taxing such corporations has presented a problem. Recognising these challenges, India had begun to tax e-commerce companies through an equalisation levy, but now the central government has notified an amendment on the definition of ‘significant economic presence’ meant to widen the income tax ambit on non-resident e-commerce companies.

The internet millennia has ushered in the time of age e-commerce and tech companies. As e-commerce and digital companies continued to grow in terms of size and customer acquisition, the problem of taxing such corporations has presented a problem. Many times such organisations have set up operations across different countries, with customer bases set across an even wider set of geographic locations. Hence, choosing a single jurisdiction to tax such corporations becomes a challenge.

Recognising these challenges, the Organisation for Economic and Corporation Development (‘OECD’) ad laid down a new digital tax plan. India had subsequently begun to tax e-commerce companies through an equalisation levy, but now the central government has notified an amendment on the definition of ‘significant economic presence’ meant to widen the income tax ambit on non-resident e-commerce companies.
 
Taxing the Digital Economy:

As a global move towards a digital economy was found to be inevitable, the OECD began work on action plans to provide recommendations on how such organisations would continue to be taxed. Under this, the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) was launched to bring together multiple jurisdictions to implement the BEPS package. BEPS refers to strategies that may be used by corporates and multi-national enterprises, created to specifically exploit the gaps in tax rules of jurisdictions to artificially shift their profits to lower tax or no-tax jurisdictions. 

The ‘BEPS package’ details several action plans that provide guidelines to help governments tackle BEPS and to ensure that the economic activities generating profit in a country is adequately taxed in that jurisdiction. Several countries including India have signed and are participating in establishing this ‘modern international tax framework’ for the digital age. All participating countries have to try implementing these rules in their domestic laws in a consistent manner.

Giant e-commerce companies are usually headquartered and operated across many countries while acting digitally as an intermediary between sellers and consumers also located in different countries. In India, e-commerce companies may be interacting with sellers and consumers online without actually creating a fixed presence in India. Since the sales for these transactions may be facilitated between sellers and consumers in different countries, companies may try to shift profits to countries with lower tax rates. Furthermore, problems of double taxation may also arise complication tax collection from these kinds of transactions.

In an effort to counter these issues, and to keep in line with the BEPs package, India had initially created an amendment to the Income Tax Act, 1967 (‘ITA’) introducing the concept of significant economic presence.

Non-resident companies in India are subject to a higher tax rate (40%), as compared to the corporate tax rate of 30% for domestic companies. Such non-resident companies are taxed based on the business generated through business connections in India or permanent establishments (if eligible under a double taxation avoidance treaty).

This is provided under section 9 of the ITA, which defines the incomes which are deemed to accrue or arise in India. In 2018, the central government had notified the addition of ‘significant economic presence’ and defined it to mean: 
  • A transaction (for goods, services, or property) where the aggregate payment exceeds the prescribed amount, in a previous year, carried out by a non-resident in India including transactions for the provision of download of data or software in India.
  • Any systematic and continuous soliciting of business activity or engaging in interaction with a prescribed number of users in India, through digital means.  
This amendment meant that any company indulging in the transactions as defined above would be considered to have income arising from business connections in India and hence that income would be liable to tax under Section 9 of the ITA. This was regardless of whether the business had any physical presence, fixed place of business, or business connection in India. However, while this definition was introduced, the parameters mentioned therein (of aggregate payments and subscriber/user activity) were not notified. This meant that the amendment continued to be non-operative till the required parameters could be adequately defined.

While this clause under the ITA continued to be inoperative till 2021, an amendment detailing the parameters was introduced at the beginning of May 2021.  The amendment has prescribed the following as the parameters:
  • For transactions: Non-resident Indians whose revenue exceeds INR 20 million for transactions of goods, services, or property, including download of data.
  • For users: Entities that systematically and continuously solicit business activity or engage in interaction with users beyond the threshold of 0.30 million in India.
The significant economic presence clause will continue to be taxed regardless of whether the non-residents have a place of business or a permanent establishment in India. While the amendment came into force in May, it is retrospectively applicable from 1st April 2021.
 
Equalisation Levy- Tax on Digital Operations:

Besides the amendment to section 9, the government had also introduced an equalisation levy via the Finance Act, 2016 under section 165 of the ITA. It was a levy of 6% taxable on e-commerce organisations to tax transactions in the nature of online advertising fees paid by such organisations to: 
  • Person resident and carrying on business in India, or
  • Professions or non-residents have a permanent establishment in India.
The Equalisation Levy was levied on transactions between businesses with a gross payment greater than INR 100,000 p.a. The levy was first applicable on only digital advertising or such facility services provided for the purpose of online advertisement by the e-commerce companies to the advertisers. This has subsequently been expanded in 2020.

The Finance Act, 2020 expanded the scope of equalisation levy to include the taxation of e-commerce supply or services at the rate of 2% for consideration received by an e-commerce operator from an e-commerce supplier or service provider if it is provided to:
  • Person resident in India, or
  • Non-residents in specific circumstances, or
  • Persons buying such goods and services using an IP address in India.
While the first equalisation levy is only chargeable on operations such as digital advertising, the 2020 amendment has expanded it to cover considerations received by such e-commerce giants from e-commerce suppliers i.e., online sale of goods and services.

The application of the equalisation levy has been controversial, with the United States even noting India as a ‘country to watch’ under the trade report of 2021, as they were critical of the second expansion of the levy.
 
Effect of the Amendment:

The parameters introduced in Section 9 via the 2021 notification have been kept at lower thresholds, particularly for the aggregate payments, meaning a wide range of non-residents may fall within the taxation. This could further impact non-resident e-commerce that does not have permanent establishments in India as they may not be able to avail benefits under the double taxation avoidance agreements. However, even if the provisions are triggered, only the income that is attributable to India will be taxed in India.

Non-resident companies that do have permanent establishments may have an easier time availing of the benefits of the double taxation agreements and may be able to pay lower tax rates. At the same time, if an e-commerce company is making payment under these provisions from the ITA, they will be exempt from payment of the equalisation levy. 

India is only one of the countries moving to tax such digital operations, and it is to be seen how other countries (especially the US) respond to such advances. Globally, countries are hopeful for an international treaty to cover the tax on such digital taxes to make the treatment under the double taxation treaties more seamless across nations.