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Union Budget 2022: Clarity on equalisation levy, royalties and fees for technical services exempted

The government has clarified several provisions concerning equalisation levy and expanded the definition of e-commerce companies in its Union Budget for 2021-22. The government now states parts of transactions corresponding to royalty payments and fees for technical services (FTS) would not attract a levy, but will instead be taxable under income tax. Finance Minister Nirmala Sitharaman, in her Budget speech on Monday, said that this was being done to “provide certainty” to companies.

“In order to provide certainty, it is being expressly clarified that transaction taxable under income-tax are not liable for equalisation levy. Further, it is also proposed to clarify regarding applicability of equalisation levy on physical/offline supply of goods and services.” — Nirmala Sitharaman, Finance Minister

The equalisation levy is a direct tax that countries impose on income from digital services, specifically income accrued by foreign e-commerce companies. The levy has been a bone of contention in international commerce; only recently, the United States criticised India’s equalisation levy regime as “discriminatory” against foreign companies. In India, the equalisation levy is at 2% of the amount received by an e-commerce operator.

“It is seen that there is need for some clarification to correctly reflect the intention of various provisions concerning this levy,” the government said in the memorandum to the Union Budget. As part of the Finance Bill, the government has expanded the definition of e-commerce activity and to whom the equalisation levy will be applied. The bill in total includes the following changes:

  • Royalty fee or technical services excluded: Amendment to ensure that any consideration received for e-commerce services “shall not include consideration which are taxable as royalty or fees for technical services in India.”
  • Expanded definition of e-commerce services: A new clause is being added to define the phrases “online sale of goods” and “online provision of services”: they shall now include either one or more of the following
    • Acceptance of offer of sale
    • Placing the purchase order
    • Acceptance of the purchase order
    • Supply of goods or provision of services, partly or wholly

Additionally, the ministry has clarified that e-commerce companies will attract the levy even if they don’t own the goods or services being sold. All amendments will take effect retrospectively, i.e., from April 1, 2020.

Industry bodies welcome move

Industry body NASSCOM has welcomed the clarification, while traders’ body Confederation of All India Traders (CAIT) stated that the move would finally bring foreign e-commerce and online companies under the equalisation levy regime. In a statement, CAIT national president B.C. Bhartia and secretary general Praveen Khandelwal said that the proposal expands the definitions of online services and goods, thereby “eliminating all confusions regarding what could be the true definition of e-commerce in India.”

This is a business-friendly move, the clarification will help reduce confusion, said Pallav Narang, partner at CNK and Associates. “When the equalisation levy was first imposed, it was only for advertising services being received in India. Last year, it was made applicable on sale of services and goods also. Now they have reduced the ambit and said that it is still applicable on goods and services you buy via e-commerce, but any item that would fall otherwise in the purview of royalties or fee for technical services will be removed from equalisation levy,” he told MediaNama.

Narang said that this was a logical step, as there is no need to impose the levy on Royalties and Fees for Technical Services (FTS) as companies have to pay TDS on it. “The impact on service providers was quite adverse, in the sense that they would have to deal with TDS as well as equalisation levy, which they could not have gotten a rebate for in their home countries. Now that spread has been reduced,” he explained.

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