India’s amended equalisation levy: a change players in the digital economy could not have foreseen

On 1 February 2020, the Indian Finance Minister delivered the country’s longest Budget speech ever. However, there was no mention of amendments to the equalisation levy introduced in Finance Act 2016—neither in her 159 minutes long speech and nor in the text of the Finance Bill 2020. The amendments nevertheless showed up in the Indian Finance Act 2020.

The scope of these amendments is startling. Both the 2016 equalisation levy and the 2020 amendments are charges on consideration received or receivable by non-residents. The former was a 6% charge limited to online advertising and certain related activities in a B2B context. By contrast, the 2020 amendments apply a 2% charge where a non-resident who owns, operates or manages a digital or electronic facility or platform makes an online sale of goods owned by it, or provides services, or facilitates online sale of goods or provision of services to a:

1. person resident in India;

2. person who buys such goods or services or both using an IP address located in India; or

3. non-resident in certain “specified circumstances”.

Moreover, while the 2016 levy is collected from the recipient, the compliance burden under the 2020 amendments is on the non-resident e-commerce operator.

These amendments can give rise to some strange situations. For instance, a sale between two non-residents involving data collected from Indian residents may be caught in the amended rules as that is one of the “specified circumstances”. Similarly, transactions of foreign e-commerce operators with their Indian subsidiaries may be caught.

As the amended rules became effective from 1 April 2020, seemingly without any consultation whatsoever, such operators would have had no time to think about the impact of these rules. Compare this with the UK’s Digital Services Tax, which was announced in Budget 2018, and went through extensive consultation process before it became the law in 2020.

The OECD still aims to deliver a global consensus-based solution to the digitalisation of the world economy by the end of the year. Patience for that, however, seems to have run out. A number of countries across the world have pressed ahead with unilateral fixes such as the UK’s DST and India’s amended equalisation levy. In the aftermath of Covid-19, countries’ need for cash might further increase the pressure for such measures. 

Whether or not these measures will be re-evaluated once the OECD’s work has concluded remains to be seen. However, in the interim, it is hoped that jurisdictions will generally give global businesses the opportunity to comment on any proposals before their introduction.