Relief for Non-resident E-commerce Operators: Abolishing the Equalisation Levy

The proposal to eliminate the EL for non-residents in digital transactions will ease compliance, boost international trade, and simplify business operations in India."

The Hon’ble Finance Minister has proposed a welcome change in the Union Budget 2024 by abolishing the Equalisation Levy (EL) of 2% on e-commerce operators, which was introduced under the Finance Act, 2020.

Existing provisions and hardships faced

Under the existing provisions, effective 01 April 2020, EL @ 2% (EL 2.0) was levied on the amount of consideration received or receivable by an e-commerce operator from e-commerce supply or services. An “e-commerce operator” refers to a non-resident who owns, operates, a digital or electronic facility or platform for online sales of goods or services, or both. EL 2.0 was imposed on the consideration received by the e-commerce operators on the specified services provided to any Indian resident, any person using an IP located in India, or non-residents under specific circumstances.

The EL 2.0 did not apply if the e-commerce operator had a permanent establishment (PE) in India and such e-commerce supply of services was effectively connected with such PE. Additionally, it did not apply where the EL @ 6% was levied or if the turnover of the e-commerce operator from the online supply of goods or services to specified receivers did not exceed INR 2 crore during the financial year.

Unlike the EL levied @ 6% on the provision of online advertisement services, EL 2.0 was required to be paid by the non-resident e-commerce operator. The EL levied @ 6% is similar to the withholding tax provisions wherein the service receiver deducts the EL before making payment to the non-resident and subsequently deposits it with the government. However, EL 2.0 mandated the service provider to directly pay the EL to the government, leading to an additional compliance burden on the non-resident service providers.

Proposed Amendment

It is proposed that the EL 2.0 shall no longer be applicable from 01 August 2024. Consequently, any income that was liable to EL 2.0, which was exempted under the IT Act (subject to certain conditions), would be exempt only after 01 April 2020 but before 01 August 2024.

Conclusion

The proposal brings relief to non-residents engaging in digital transactions in India by eliminating the EL. This move will significantly improve international trade as well as enhance the ease of doing business in India. It will also significantly alleviate the current compliance burden on non-resident e-commerce operators due to the applicability of the EL. Initially, it was anticipated that EL will remain applicable in India until the ongoing discussions on Pillar 2 are concluded and the pillar is brought into effect.

It is also noteworthy that on 28 June 2024, India and the United States agreed to extend their transitional agreement on the EL until 30 June 2024. The agreement was originally valid until 31 March 2024 or upon the implementation of the OECD Pillar 1, whichever came first, indicating that the essence of the agreement was transitional, and that EL is expected to be phased out once the OECD Pillars are implemented.

Whether the elimination of EL is a step towards adopting a two-pillar solution remains to be seen.

Source:- Financial Express