Email exchange within firms, transactions on internal systems may face 2% tax

A request by an automobile company to its parent located outside India for shipping back certain spare parts through an internal system, hotel booking made by an Indian CEO in a foreign location or an email exchange about developing a particular software—all these could now attract equalisation levy.

As India broadened the scope of equalisation levy without clarifying what exactly it means by e-commerce or online, a new set of problems is set to create fresh headaches for several Indian subsidiaries of multinationals.

The government has further expanded the scope of the equalisation levy – imposed on cross border digital transactions in 2016 in a bid to tax internet giants’ digital advertising revenues from India to include any purchase by an Indian or India-based entity through an overseas ecommerce platform.

Now, many firms fear that all kinds of transactions including hotel bookings, software purchase and even buying certain components from overseas could come under the gamut of the levy.

Legal experts say that the way the law is worded even ERP (enterprise resource planning) systems—the internal software systems several companies use—could technically be considered an online platform and attract the levy.

“The wordings of equalisation levy seems to cover transactions under brick and mortar model also if undertaken through internal ERP systems (fully or partially) of companies. This will be an additional cost for companies” said Amit Singhania, a partner at Shardul Amarchand Mangaldas.

In the budget the government proposed to broaden the scope of equalisation levy.

The new regulations now define online sale of goods or services as any purchase that has been made online, online payment or even an offer that’s accepted online.

This essentially covers every transaction, argue experts.

The new regulations say that even if part of the transaction were to happen offline, but even if another bit happens online, the 2% tax can be applied on that.

“This may cover all e-commerce transactions in their broadest sense without exemption for intragroup transactions,” said Shefali Goradia, Partner at Deloitte.

As per the proposed amendment even if one of the activities in the chain i.e. order placement, order acceptance, payments or supply of goods and services is carried online, the gross transaction value would be subject to the levy.

“This could potentially result in taxation of numerous transactions where only one leg of the transaction happens online which is the case today with almost all commercial transactions,” said Rajesh H Gandhi, partner, Deloitte India.

For instance purchase of goods or services from abroad where only the payment is made through an online mode or B2B sales where orders are commonly booked through ERP systems could now be subject to the levy, say tax experts.

Thousands of inter-group transactions involving multinationals and their overseas subsidiaries or parents will potentially attract additional 2% tax if these have taken place online—either through emails or any internal systems.

Several industry experts and economists are also pointing out how Covid pandemic is set to create a situation where large economies including India, the US, the UK, China and EU would compete for tax revenues.

Market watchers fear, countries could start a tug of war for taxing these digital giants on the same or similar revenues in absence of any definitive global tax framework.

India was the first country to introduce a digital tax in the form of equalisation levy. India in 2018 had said that global digital companies had a large consumer base in India but did not pay enough taxes.