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Equalization Levy 2.0: Uncertainties Abound 


By Stella Joseph and Niraj Hande

Effective April 1, 2020, India has expanded its regime of equalization levy to cover ‘e-commerce supply’ by non-resident electronic commerce operators (ECOs) having operations related to India. The levy comes close on the heels of similar changes introduced by various European countries, though compared to its global counterparts, this Indian levy seems to be the widest in its scope. 

The almost surreptitious introduction of this expanded levy manifested when the draft of the Finance Bill, 2020, as passed by the Lok Sabha was made public. There was no indication of this levy either in the Union Budget Speech or the Finance Bill, 2020 as released on the Budget day. Thus, there is effectively no indication about the intention behind the said expanded levy. Nor is there any aid for interpretation in the form of memorandum to the finance Bill/notes to sections/circular, which would have been crucial to interpret provisions which may be ambiguous.   

The expanded levy as it stands today has a very wide ambit and reach, and it is critical for non-resident e-commerce suppliers/ businesses undertaking transactions online to fathom and decipher the true contours of the levy. In this context, the present article attempts to bring to fore certain ambiguities which exist in relation to the levy and the practical issues which arise on account of these ambiguities. 

Equalisation Levy Version 1.0

Equalisation levy was first introduced in Finance Act, 2016 in respect of specified services* like that of online advertisements. In terms of the Budget Speech of 2016, this levy was introduced “In order to tap tax on income accruing to foreign e-commerce companies from India”. This equalisation levy (of 6%) is payable by the recipient of service (located in India) and applicable only on the specified services procured from a non-resident whose aggregate consideration from India for supply of such services was in excess of INR 100,000 with certain carve-outs. 

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It is important to note that though it was a tax on the income accrued to non-resident ECOs in India (according to the Budget Speech), the liability to discharge the same was affixed upon the Indian recipient of services, thereby, in a manner, the income of non-residents supplying specified services continued to be exclusively taxable in their countries of residence (even though accruing in India).  

Changes introduced by Finance Act, 2020: Expansion of Equalisation Levy

Now, vide Finance Act, 2020, with effect from 1st April, 2020, a new Section 165A has been inserted in Finance Act, 2016, which from April 1 extends the scope of equalization levy. The levy will also cover the consideration received or receivable for “e-commerce supply or services made or provided or facilitated by an e-commerce operator” within its ambit. The noteworthy provisions in this regard are iterated below:

  1. “e-commerce operator” has been defined to mean “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”; 
  2. “e-commerce supply or service” has been defined to mean:
    1. Online sale of goods owned by the e-commerce operator;
    2. Online provision of services provided by the e-commerce operator;
    3. Online sale of goods or provision of services or both facilitated by the e-commerce operator; or
    4. Any combination of the above activities.

In terms of this newly added provision “there shall be charged an equalisation levy at the rate of two per cent. 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—

  1. to a person resident in India; or
  2. to a non-resident in the specified circumstances…; or
  3. to a person who buys such goods or services or both using internet protocol address located in India”

The circumstances in which equalisation levy will be payable in India (by non-resident ECO) even if the recipient of service is a non-resident have been set out to be: 

    1. Sale of advertisement which targets a customer who is resident in India or a customer who accesses the advertisement through internet protocol address located in India; and
    2. Sale of data collected from a person who is resident in India or from a person who uses internet protocol address located in India. 

However, a carve-out from equalisation levy has been provided in respect of three specific scenarios:

  1. where the e-commerce operator making or providing or facilitating e-commerce supply or services has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment;
  2. where the equalisation levy is leviable under section 165; or
  3. sales, turnover or gross receipts, as the case may be, of the e-commerce operator from the e-commerce supply or services made or provided or facilitated as referred to in sub-section (1) is less than two crore rupees during the previous year”

It is noteworthy that when it comes to online provision of services by non-resident suppliers, which qualify as “online information and database access or retrieval services” under the GST legislation,  there will in effect be two levies to be discharged by the non-resident supplier, one of GST (@ 18%) though which is to be borne by the customer, and the other of equalisation levy which is to be borne by the non-resident supplier itself. 

Persisting Ambiguities

While it can be expected that the Government clarifies the finer details of the levy, ambiguities persist around certain aspects of the expanded levy.

1. What is the true coverage of the expanded levy?

The above wide sweep of the definitions of “e-commerce operator” and “e-commerce supply of goods and service”, would necessitate the need to re-evaluate all business operations conducted online since many of such operations, which are not typically understood as e-commerce operations may fall within its ambit.

For instance, it is a common occurrence for companies to operate websites to familiarize potential customers of its products and allow for placing orders / enquiries if required. If one was to give a literal reading of the provision, and in the absence of any other aid of interpretation which would indicate the intention of the Government, such websites may also be said to be covered within the expanded scope the levy since the definition of the term “e-commerce operator” may be seen to be wide enough to cover websites maintained by a non-resident person on which orders / enquiries can be placed by customers. Even, the definition of the term “e-commerce sales” may be seen to be wide enough to include not only finalization of orders on the web-site of the non-resident person, but also placing of orders through e-mails / VoIPs or any sort of “online” communication.

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Like the above, there would be several examples of transactions, including that of a Multinational Group mandating a usage of a common platform for all subsidiary procurements, which may in the literal sense fall within the scope of the levy, though intuitively and in common parlance, they may not be understood as e-commerce transactions.  Till the time the true intention as regards the scope of the levy is clarified by the Government, it is advisable that businesses having any operations online should carry out a microscopic evaluation of what would be outside the ambit and what could potentially fall within the scope of the levy.  

2. What will be “consideration” for a marketplace ECO  i.e. an online facilitator? 

A marketplace e-commerce entity does not supply goods / services on its own account, but rather, acts as a medium between the buyer and seller for the sale. In most cases, consideration for these sales are collected by the ECO and onward passed on to the e-commerce participant usually after retaining its commission. In such cases, the “consideration received or receivable” by the non-resident ECO for facilitating such supply is merely his commission and equalisation levy ought to be levied on this amount. 

However, it is possible to misread Section 165A to conclude that the entire consideration paid by the customer located in India (and in the first instance received by the ECO) is exigible to equalisation levy and not merely the commission which is earned by the ECO from such transaction; adequate clarity in this regard would be a welcome step. 

3. Determination of supplies on which equalisation levy is applicable

Equalisation levy is payable in respect of e-commerce supplies made inter alia to, (a) person resident in India or (b) person who buys such goods or services or both using internet protocol address located in India.

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While one would imagine that the levy in respect of the second trance of supplies, viz.  made using internet protocol (IP) address located in India may be fairly easier to determine, non-resident ECOs will need to develop internal systems for auto-segregation of such transactions. It is noteworthy that some of these transactions may also cover persons who though not located in India log on to internet services through an Indian IP address by using the numerous freely available Virtual Private Networks (VPNs). Further, for the transactions in the first tranche, foreign ECOs may be required to develop systems to seek details from its customers regarding their place of residence, albeit there is still no clarity whether the tax department would accept this methodology.

4. Whether there is a double taxation of consideration received by foreign ECOs for such supplies for FY 2020-21 be includable in their income

Along with the expansion of Equalisation levy, the Finance Act, 2020 also amended  Section 10(50) of the Income tax Act, which, post amendment sets out that “any income… or arising from any e-commerce supply or services made or provided or facilitated on or after April 1, 2021 and chargeable to equalisation levy..” is to not be included in the total income of such person. 

Given that the date provided in April 1, 2021, one wonders if for FY 2020-21, there may be a situation of double taxation of the income for non-resident ECOs up till April 1, 2021 i.e. in case of an overlap, they may be liable to both equalisation levy as also income tax under the Income tax Act.


The above ambiguities, though indicative in nature, showcase the issues associated with introduction of an overnight tax regime without providing any opportunity for stakeholders to provide comments thereto. While various global lobbying groups including the United States Chamber of Commerce have urged India to delay the implementation of equalisation levy on account of the COVID-19 fallout, one hopes that the introduction of equalisation levy is deferred and the ambiguities in law are cleared by way of issuance of rules. However, time has come for business to revisit their electronic operations to keep any surprises at bay and evaluate options to re-structure their transactions in order to mitigate tax exposure. 

* Defined to mean “online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf

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Stella Joseph is Associate Partner, and Niraj Hande is Senior Associate at Economic Laws Practice.

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