Tax Issue for Foreign E-commerce Company

The impact of COVID-19  is being widely felt around the world and has led many businesses to move to the digitization platform. Businesses are contemplating moving to digital mode- whether it is supply chain through e-commerce platform or marketing of the product, digital payments, reorienting back-office operations (HR, administration, accounts, etc) to firms who are well equipped to handle through digital mode. Almost everything is now being moved to digitization mode. In this article, we throw some light on the tax challenges of foreign companies deriving income from India on e-commerce platforms. A. Tax Challenges for foreign e-commerce players deriving income from India The Indian tax laws through Union Budget 2016 and 2020 introduced and broadened the equalization tax regime in a very aggressive manner. The Equalization Levy was introduced at 6% on online advertisement in 2016 and further broadening the scope in 2020 by introducing 2%  on gross revenue generated by non-resident e-commerce operators from Indian customers where ‘e-commerce operator’ does not have a PE in India. The above levy @ 2% is a wider tax as it is a straight tax cost on the following business models:-

• • online sellers of goods– like Rakuten (Japan), Amazon from the USA, Alibaba.com from China
  • online streaming/ content service– like Netflix (USA), Amazon-Prime (USA).
  • Gaming companies and tech service providers

The levy of 2% on the gross amount is very wide as it covers a wide range i.e. B to C business models and not only B to B model, it includes taxation by bringing any person using Indian IP address or tech companies providing services to Indian customers or even gaming companies. Illustrative tax may occur in the following cases:-

• • An Indian resident purchasing goods online
  • A transaction between Amazon U.K. and Amazon India.
  • Foreign online gaming platforms where Indian individual signs up using an Indian IP address;
  • A transaction between two non-residents where data of Indian residents are used to sell

Further, equalization levy is a special levy and is outside the purview of Indian income tax law by specific exclusion. Hence, foreign companies may not be able to claim the tax credit in home countries. B. Compliance by e-commerce company for equalization levy:- Tax collection and compliance mechanism for equalization levy are on the service provider i.e. foreign company where the annual threshold limit of INR 2 crores ( USD 266,666)  is breached. Any default attracts interest, penalties, and prosecution in terms of Chapter VIII of Finance Act Next Steps:- Though tracking of compliance is difficult, foreign Companies will have to evaluate very carefully and may need to review their business models on various parameters such as coverage in terms of business model, transaction types, PE formation in India, taxation/exemption under Income tax laws and dispute resolution with tax authorities in India. We at MBG Corporate Services have an in-depth understanding and a strong team that can help in navigating Risks and making compliances. We are also expecting more changes in the taxation of digital transactions in the coming time and shall keep you posted. Please connect with us if you would like to discuss the next steps. Last Updated: 20th May 2020 This article is contributed by: Manoj Pandey Director, International Taxes

Tag: Latest Tax Update, Tax Issue