Taxation of Digital Transactions and

Taxation of Digital

Transactions and

Upcoming changes

SPEAKERS:

CA KARANJOT SINGH

CA HARSHIT KHURANA

OVERVIEW.

02

• Need for Digital tax

• Background behind Digital Tax

• BEPS Action Plan 1

• Equalisation Levy 2016 – Overview

• Equalisation Levy 2020 – Overview and case studies

• EL Interplay with tax treaties

• Constitutional validity of EL provisions

• Significant Economic presence

• Global perspective of digital tax

• Concluding remarks

Need for Digital tax.

03

• Traditionally taxation provisions targeted the revenue earning operations

• Revenue earning operations traced to physical locations

• Profits attributed to each location and taxed accordingly

• Ahmedbhai Umarbhai & Co: [1950] 18 ITR 472 (SC)

• Taxpayer had oil mill outside in Raichur (outside taxable territory)

• Oil was sold in Bombay (inside taxable territory)

• As per tax department: As oil sold in India, entire income can be taxed in India

• As per SC: a portion of the profits does accrue at the place of manufacture... For purposes of computation, the

two parts of the business may be conceived of as being carried on by two different sets of persons.

Need for Digital tax.

04

• Report submitted to League of Nations:

“The oranges upon the trees in California are not acquired wealth until they are picked, not even at that stage until

they are packed, and not even at that stage until they are transported to the place where demand exists and until

they are put where the consumer can use them. These stages, upto the point where wealth reached fruition, may

be shared in by different territorial authorities.”

• Profits traced to business operations codified in Income-tax Act: Explanation 1 to section 9(1)(i)

• In the case of a business of which all the operations are not carried out in India, the income of the business

deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably

attributable to the operations carried out in India

Background behind Digital Tax.

2015

• BEPS Action Plan 1

2016 2018 2020

• Equalisation Levy 2016

was introduced

• Applicable from –

1st June 2016

• Significant Economic

Presence (‘SEP’)

proposed from 2019 –

rules not prescribed

• Equalisation levy 2.0

introduced from April

2020

• SEP deferred to April

2022

05

• SEP Rules notified

applicable from FY

2021-22

2021

BEPS Action Plan 1 – Measures discussed.

• New nexus test

• Based upon presence of non-

resident in source country due to

digital factors.

• Factors: Turnover, presence of

digital platform, conclusion of

through digital platform, users etc.

• Present rules focus on performance

of physical operations in source state

• In SEP, present rules may fail

• New rules required

• Options –

• Fractional apportionment

• Modified deemed profit

method

• WHT to support application of SEP

• For B2B – the payer of income can be

expected to comply

• For B2C – intermediaries processing

payment could withhold tax

SEP

6

• Intended to serve as a way to tax NR’s SEP in source country without PAR

• Scope of EL

• Option 1 – Apply the levy only where the business maintains SEP

• Option 2 – Cover transactions where conclusion of contract for sale of

goods or services happens over digital platform

• Option 3 – Cover limited transactions where data and other

contributions gathered from in-country customers and users

Profit attribution rules (PAR) WHT

Equalisation Levy

Equalisation Levy 2016

07

Overview of EL 2016.

• Applicable if non-resident

is providing online advertising,

provision for digital

advertising space, etc. to

resident or PE of NR in India

• 6% of consideration

Exclusions

• Non-resident service provider

has PE in India and specified

service connected with PE

• B2C transactions

• Aggregate consideration is less

than INR 1 Lakh

• Payer is required to deduct and

deposit EL

• Service provider not responsible

to pay

Basic Charge Scope exclusion Collection and recovery

08

Equalisation Levy 2020

09


• Applicable on non-resident

e-commerce operator

• 2% of consideration

Chargeable on e-commerce

supply or services

• To be paid by e-commerce

operator

• Payment on quarterly basis

• If defaulted, recovery can be

made from payer?

Basic Charge Scope Collection and recovery

10


Online sellers of Goods

like

Online Service

Providers like

Online Aggregators /

Marketplaces like

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• Basic Charge

• EL @ 2% of the amount of consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated by it—

to a person resident in India to a non-resident in the specified

circumstances

to a person who buys such goods

or services or both using IP

address located in India

sale of advertisement, which targets a

customer, who is resident in India

or a customer who accesses the

advertisement through IP address

located in India;

sale of data collected from a

person who is resident in India

or from a person who uses IP

address located in India

12


“consideration received or receivable from e-commerce supply or services” shall include –

• Consideration for sale of goods or services irrespective of whether e-commerce operator

owns the goods or whether the service is provided or facilitated by the operator.

• Exclusions from consideration:

• It shall not include consideration for sale of such goods or services which are owned by a person

resident in India or by PE of a person non-resident in India, if such sale is effectively connected to

the PE.

“e-commerce operator” means

• a 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

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“e-commerce supply or services” means

• online sale of goods owned by the e-commerce operator; or

• online provision of services provided by the e-commerce operator; or

• online sale of goods or provision of services or both, facilitated by the e-commerce operator;

or

• any combination of activities listed above

“online sale of goods” and “online provision of services”

The above expressions used in the definition of “e-commerce supply or services” shall include one or

more of the following online activities, namely:—

• acceptance of offer for sale; or

• placing of purchase order; or

• acceptance of the purchase order; or

• payment of consideration; or

• supply of goods or provision of services, partly or wholly14


E-commerce operator has a PE in

India and such e-commerce supply

or services is effectively connected

with such PE

Where EL 2016 is chargeable Sales, turnover or gross receipts of

e-commerce operator from

specified e-commerce supplies /

Services < INR 2Cr or

USD 0.27 Million (approx.)

Exclusions

15

EL is not applicable if the

consideration is taxable under

income-tax as Royalty or Fees for

Technical Services.

Case Study 1 – Sale of goods (B2C).

Facts

• F Co. manages F Co.com

• B2C transaction:

• F Co. and Indian customer contract online for sale of laptop

• Invoicing and Payment also online

• Delivery offline

F Co.

F Co. com

Offline delivery

Amount paid

16

Online contract

Individual customer

Case Study 2 – Sale of goods(B2B).

Facts


• F Co. and I Co. contract offline for sale of laptops

▪ Distribution Agreement

▪ All T&C’s including price agreed offline

• Quantity specified in PO online via SAP

• Invoicing and Payment online via SAP

• Delivery offline I Co.

F Co.

F Co. com

Offline deliveryOffline contract

Online PO

17

Amount paid

Case Study 3 – Provision of services.

Facts


• F Co. and I Co. contract offline for IT services

▪ Invoicing and Payment offline

• Access to online database through F Co. com

• Provision of group IT services done online through F Co.com

I Co.

F Co.

F Co. com

Online rendition Offline contract

18

Fee paid

Case Study 4 – Provision of services.

Facts

• F Co. is a hotel owner and manages F Co.com

• F Co. and I Co. contract online for hotel booking

• Rendition of service happens offline

I Co.

F Co.

F Co. com

Offline rendition Online contract

19

Fee paid

Case Study 5 – Facilitator (Marketplace model).

20

• Facts


• F Co. sells US Co.’s laptop through F Co.com

• Contract with customer online

• Consideration received online by F Co. is $100

• F Co. retains service fee ($20), pays rest to US Co.

($80)

• Issues

• Whether F Co. or US Co. liable to pay EL?

• EL payable only on $20 or $80 or entire $100 ?

US Co.

Payment ($80)

Online

contract

List Products

Delivery

Customer

Payment

($100)

F Co.

F Co.com

Essence of discussion.

• The first thing is to ask

yourself -

• Is your company exporting

goods or services to India?

Whether all activities

are done physically?

Yes

No

• Online Negotiations?

• Online Ordering?

• Online Delivery of goods?

• Online rendition of

services?

• Payment?

Yes

Requires detailed analysis

Whether some

activities are done

online? If yes, which

one?

21

Interplay with Tax Treaties.

22

Whether EL is in the nature of

Tax on income?

If yes If no

• Covered under the scope of Treaty

• Is EL payable in India?

• Section 90(2) applicable only to levy

under the Income Tax Act

• EL levied under Finance Act, 2016

• Tax credit by residence country (US)

• No credit if EL not in line with Treaty

• No benefit under Tax Treaty

• EL payable

Constitutional Validity of EL.

23

Perspectives

• Extraterritorial Operation - EL provisions have sufficient nexus with India ?

• If tax on Income (Entry 82 of Union List): EL violative of treaty obligations of India?

• If tax on consideration for supply of goods or services (Article 246A vs Entry 97 of Union List):

• EL not based on the recommendation of the GST Council (Article 269A)?

Compliances.

24

Payment of EL Filing of statement

Default in payment Recovery

• Interest @ 1% per month

• Penalty (equal to unpaid EL amount)

Quarterly

If non-resident does not pay -

• Recovery can potentially be made from

Indian customer

Yearly

Significant Economic Presence

25

Significant Economic Presence.

26

• Introduced in IT Act vide Finance Act, 2018

• Non-residents are deemed to have business connection in India by way of SEP in cases where:

• the total payments arising out of supply of goods or services by a non-resident exceeds INR 2 Crores in a FY; or

• the non-resident vendor systematically and continuously solicits business or interacts with 3 lakhs users in India

• The transactions or activities shall constitute SEP whether or not:

- the agreement for such transactions or activities is entered in India; or

- the non-resident has a residence or place of business in India; or

- the non-resident renders services in India


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• Profit Attribution to SEP:

• Entire income attributable to transactions constituting SEP deemed to accrue or arise in India

• In addition following incomes attributable to SEP

- Income from advertisement which targets Indian customer or customer who accesses through Indian IP

- Income from sale of data collected from an Indian resident or a person using Indian IP address

- Income from sale of goods or services using data collected from resident or person using Indian IP address

• Impact in case of non-treaty countries- SEP applicable!

• Denial of treaty benefit- GAAR and PPT


28

• Treaty Countries- MLI and SEP

- SEP provisions not directly applicable

- Concept of PE has been widened by MLI

- Can there be DAPE on account of marketing or other similar functions?

- If there is PE, can profit be attributed to PE as per SEP provisions

- Impact in case of countries allowing customary approach of profit attribution

• Tax withholding on sums payable to non-residents post SEP

Global Perspective of Digital Tax

29

Global Measures for Digital tax.

30

Digital Services

Tax by

Withholding

Tax by

Digital PE / Significant

Economic Presence by

Global Consensus – How far it is?.

31

2015

BEPS Action Plan 1

Highlighted the issues suggested measures such as (eq levy, SEP, profit allocation rules), but did not recommend any

2018

Interim report released by OECD

Recognized the need for change in the age old international tax rules, to tax digital businesses in the country where value is created

October 2019

Public Consultation - Secretariat's Proposal for a "Unified Approach" under Pillar One - New nexus rule and profit attribution rule were provided under unified approach

November 2019

Public Consultation - Global Anti-Base Erosion (GloBE) Proposal under Pillar Two - Solutions to problem of shifting profits from a high tax jurisdiction to low tax jurisdictions

Global Consensus – How far it is?.

32

2020

Tax Challenges Arising from Digitalisation

- Report on the Pillar One Blueprint

Tax Challenges Arising from Digitalisation

Report on Pillar two blueprint

Final report awaited

After the final report, countries will have to implement the consensus-based solution

2021

OECD Report on Pillar 1.

33

• Pillar one proposal provides a “unified approach” to resolve the problem of digital taxation

• The purpose is to provide a taxing right to user/market jurisdiction

• A new nexus rule is introduced not dependent on physical presence but based on sales and other plus factors (which

suggest sustained presence in market)

• Mechanism for profit allocation

• Amount A

• Share of deemed residual profit to be allocated towards market jurisdiction

• Deemed residual profit – Total Profits (less) profit for routine activities (less) share of residual profits towards

other intangibles

• Amount B - fixed remuneration for baseline marketing and distribution functions that take place in the market

jurisdiction

OECD Report on Pillar 2.

34

• Designed to ensure that large internationally operating businesses pay a minimum level of tax

• Rules provided to ensure minimum taxation while avoiding double taxation or taxation where there is no economic

profit.

Global Anti Base Erosion

RulesSubject to Tax Rule

• Aimed at imposing a top up tax on the

income charged to tax at below the

minimum tax rate.

• Divided into following:

• Income-inclusion rule

• Undertaxed payment rule

• Rule to form part of treaty or MLI

• Targets BEPS risk in intra group

structures and in case of specific

payments such as interest, royalty etc.

• Minimum rate of tax to be defined.

• If payment taxed at below minimum

rate in payee jurisdiction, source

country can tax upto minimum rate.

Concluding remarks.

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• Taxation of digital transactions- An evolving concept

• Will require global consensus to settle the dispute

• Unilateral measures may increase cost for taxpayers

• Requirement to analyse the cross-border transactions to dissect tax exposure at each stage

• Indian taxpayers should analyse if there is any requirement to withhold tax or report transaction

New Delhi

Mumbai

Chennai

Bengaluru

Hyderabad

Ahmedabad

Pune

Kolkata

Chandigarh

Gurugram

Prayagraj (Allahabad)

Kochi

LOCATIONS IN INDIAFOR ANY QUERIES, PLEASE WRITE TO:

Harshit [email protected]

Karanjot Singh [email protected]

36

mailto:[email protected]

mailto:[email protected]

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