The 2% levy paid by foreign “e-commerce operators” on gross wages seeks to address tax challenges in an increasingly digital economy.
In cases where a local buyer and seller transact business through a foreign e-commerce platform, imposing the countervailing duty directly on the total consideration would amount to double taxation.
Imagine an Indian business traveler booking a Rs 15,000 apartment for rent from a local property owner through a US online rental marketplace, which collects a commission of Rs 3,000 and pays Rs 12,000 to the property owner. The e-commerce operator should ideally pay a levy on Rs 3,000 – rather than the whole amount as the person renting the property would be taxed on the Rs 12,000 rental income. Similarly, if a local shopper orders ethnic clothing or handicrafts for sale in a foreign online market by an Indian seller, the levy would double.
At present, the text of the law or the changes proposed in the Finance Bill 2021 do not make an exception or offer a spin-off to avoid double taxation.
The point was raised by a leading industry body in a post-budget discussion with CBDT joint secretary Kamlesh Varshney, who agreed it was a “valid point”.
“Not all issues resolved”
“…(there) may be situations where e-commerce participants are Indians and their gross consideration enters into the considerations of e-commerce operators… There are problems and the government does not say that all problems of the proposal in the Finance Bill,” Varshney said during the interaction. When asked by ET if the CBDT could reconsider the proposal or the law, a CBDT official said, “It would be considered in due course.” There was no official response from the CBDT spokesman.
“The levy rules as they stand impose a 2% liability on a non-resident e-commerce operator when making deliveries to Indian residents or facilitating delivery. Therefore, it applies when the buyer is based in India and the platform facilitating the sale is owned or operated by a non-resident company. The law is silent on the status of the seller,” said Ajay Rotti, partner at Dhruv Advisors.
“Technically, if an Indian resident in India is registered as a seller on one of the foreign websites and another Indian buys those goods, a countervailing levy would be payable by the non-resident platform. The fee is charged on a gross basis. This could result in unintended double taxation in India as the seller, who is resident in India, would be subject to income tax on the gains made by him on such a sale….
“It would be good if the government could change the law or issue appropriate clarifications to exclude transactions conducted on foreign e-commerce sites where the seller and buyer are both based in India,” he said.
The Finance Act 2020 had extended the scope of the countervailing levy to the consideration received by “e-commerce operators” from “e-commerce supplies or services”. The levy has applied since April 1, 2020. For this purpose, an “e-commerce operator” is defined as a non-resident who owns, operates or manages a digital or electronic facility or platform for the online sale of goods that provision of services.
industry surprised
Aside from the fact that an e-commerce operator may not have sufficient margin to absorb the levy, the industry is baffled by the Finance Act 2021 proposal to expand the scope of the levy.
According to Shefali Goradia, Partner at Deloitte India, “Under the Finance Bill, any activity related to the sales lifecycle that takes place online will make the entire transaction chargeable. Suppose an Indian subsidiary of a multinational corporation buys laptops by placing a procurement order in the corporation’s ERP system, which then ships them to India.
It is unclear whether an internal portal accessible to all Group companies would qualify as an electronic platform. If so, is such a transaction subject to the countervailing levy? It must also be clear that payment gateways are not subject to the EL on the gross consideration, especially when the foreign market has already paid a countervailing levy,” she said.
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