Equalization Levy Compliance Framework for Non-Resident E-Commerce Operators in India ( August 10, 2023 )

In keeping with the OECD’s BEPS provisions, India has in place an equalization levy since 2016, which was amended in the Finance Act 2020. We discuss how this digital tax mechanism impacts non-resident e-commerce operators in India.

The rapid evolution of information technology has ushered in a transformative era for businesses, with the advent of 4G and 5G technologies providing crucial support for the digital transition. This shift has enabled businesses to operate seamlessly through digital platforms, transcending geographical boundaries.

Consequently, the conventional principles of taxation based on residency or permanent establishment find themselves inadequate in this dynamic landscape.

Responding to this global call, the Organization for Economic Co-operation and Development (OECD) introduced a remedy through its Base Erosion and Profit Shifting (BEPS) project. This entailed recommending a withholding tax on payments pertaining to digital goods and services furnished by foreign e-commerce operators.

In response, India introduced the equalization levy, a digital tax mechanism, in 2016. Initially, it applied to online advertisements and related payments for utilizing digital ad space, set at a six percent rate for non-residents without a permanent establishment in India. However, as of April 1, 2020, the Indian government has extended the scope of the equalization levy.

The Finance Act, 2020, introduced a new provision – Section 165A – which mandates that non-resident e-commerce operators providing e-commerce supplies or services to Indian residents must remit an equalization levy. This levy, set at a rate of two percent, is calculated based on the consideration received or expected from e-commerce supplies or services facilitated, provided, or delivered by the said operator.

Now, the equalization levy encompasses e-commerce transactions involving the sale of goods and services by non-resident operators to Indian customers. This levy stands at two percent and is imposed on the consideration received or expected by these non-resident e-commerce operators. This change showcases the government’s endeavor to adapt taxation norms to the evolving landscape of digital business operations.

In essence, the equalization levy represents a taxation mechanism applicable to:

(a) Designated services, as established by the Finance Act of 2016; and

(b) E-commerce supplies or services, as delineated under the Finance Act of 2020.