What the hell is EL exactly?

CONTEXT: Recently Delhi High Court held that Mastercard had permanent establishments (place of business) in India, paying their due tax on business income; hence not expected to pay Equalisation Levy (EL).

What is Equalisation Levy (EL)?

• A direct tax, deducted at source.

• Scope expanded by the Finance Act, 2000: To cover non-resident e-commerce operators
• They would have to pay tax at 2% on the consideration received for online sales of goods or services.
• Covered both B2B and B2C transactions, but did not apply where the sales, turnover or gross receipts of the non-resident entity were less than ? 2 crores in a fiscal year.

Issues with the EL:

• Lack of Clarity on the following issues:

• Over inclusion of physical goods and services, where e-commerce operators merely facilitate placement of orders or delivery, under the taxation.
• Over the base of taxation: whether to charged only on the income (e.g., facilitation fees) of the e-commerce operator, or on the gross value of the goods or services.
• Interplay with other taxation: For, E.g. If the transaction is subject to EL, then it should not be subject to a withholding tax in India, because it can also be construed as payment for royalty or fees for technical services.
• Trade Distortions: India’s unilateral move has come in for investigation by US authorities, who have already actioned against France, by way of higher tariffs on imports.

Measures for Global Consensus

• Secretariat of 1initiative by Organisation for Economic Cooperation and Development (OECD) proposed a ‘unified approach’ under broad framework:

• Nexus Rule: Taxes are to be paid by large MNCs engaged in consumer-facing business and profit allocation rules.
• Residual profits to be allocated to countries where customers reside.

• UN Committee of Experts on International Cooperation in Tax Matters amended the UN Model Treaty, addressing digital taxation and incorporating a new article; 

• Nexus will be determined based on local revenues alone, and global thresholds will not count for determining whether or not an MNC should be covered by the proposed norms.
• A withholding tax mechanism, coupled with an alternative net basis fractional approach (a percentage of local sales to global sales) would determine profit allocations.
• New article would amend all treaties of signatory countries: while keeping the Double taxation provisions intact.

• In-scope activities to be covered by OECD as well as UN like

• Automated digital services, including online search engines, intermediation platforms, advertising services and gaming, social media platforms, digital streaming and cloud computing.

Conclusion: A global consensus — rather than a unilateral approach, which in the case of India, has left stakeholders grappling for answers — is the best way forward.