India Finance Act Equalization Act Amendment: E-Commerce Impact

INTRODUCTION

The infamous amendment by the Finance Act, 2020 expanded the scope of Equalization Levy (“EL”) to apply EL on the amount of ‘consideration received or receivable’ by an e-commerce operator from e-commerce supply or services made or provided or facilitated by or through it to specified persons (“Expanded EL”).

The Memorandum to the Finance Bill, 2021 (“Finance Bill”) notes that the Government felt the need to provide certain clarifications to correctly reflect the intention of certain provisions of the Expanded EL. The changes have brought with them further questions and potentially unintended consequences.

However, there are further doubts now regarding whether the scope of the Expanded EL is large enough to cover situations where even a communications platform or a payment aggregator could be covered within its scope, even though no commission is earned by it. For example, if a non-resident platform enables users to message each other and two parties agree to sell a tangible good, would such platform be required to deduct EL at 2% even though it provides free services to the users, may not even be aware of the transaction happening and in any case is not responsible in any ways for collecting or settling payments between the users.

In this hotline, we discuss the impact of the definition of ‘consideration received or receivable from e-commerce supply or services’ proposed under the Finance Bill and the potential impact on different digital business models. We also seek to highlight the numerous problems and practical challenges in going down this path. We take a plain vanilla example which was what the amendment sought to presumably address and then we analyse possible unintended consequences.

AMENDMENT BY FINANCE BILL

The term ‘consideration received or receivable’ was not defined under the provisions of Expanded EL as introduced by the Finance Act, 2020. In case of marketplace e-commerce operators, whereby the e-commerce operator is merely facilitating the sale of goods or provision of service between the seller and buyer on its platform in lieu of commission from the registered seller or buyer or both, it was unclear whether the Expanded EL would apply on the entire consideration of the transaction or only on the commission earned by the e-commerce operator. It appears that in this context the Finance Bill has proposed to define the term ‘consideration received or receivable from e-commerce supply or services’.

The Finance Bill proposes to define the scope of ‘consideration received or receivable from e-commerce supply or services’ to include the below:

1. consideration for sale of goods irrespective of whether the e-commerce operator owns the goods;

2. consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator.

This has the potential to have a significant impact on marketplaces operated by the e-commerce operators since the Expanded EL is now likely to apply on the total value of the sale of goods or provision of services facilitated by them as opposed to being charged only on any commission earned by the platform. This is likely to create cash flow issues for the e-commerce operators. Further, it is unclear whether Expanded EL will be applicable in situations wherein marketplaces facilitate sale of goods or provision of service without charging any commission from either the buyer or seller.

UNINTENDED CONSEQUENCES OF EL PROVISIONS OR JUST AN OVERBROAD PROVISION?

The provisions of EL are contained in Chapter VIII (containing Section 163 to Section 180) of the Finance Act, 2016 (“FA, 2016”), as a separate, self-contained code, not forming part of the Income-tax Act, 1961 (“ITA”). Section 163 of the FA, 2016 provides that provisions of Chapter VIII shall inter-alia apply to consideration received or receivable for e-commerce supply or services made or provided or facilitated on or after April 1, 2020. In contrast, the charging provision, Section 165A of the FA, 2016 provides that Expanded EL shall apply on the amount of consideration received or receivable by an e-commerce operator from e-commerce supply or services. Therefore, it appears that the extent and applicability of Expanded EL (as provided under Section 163) is narrower and is limited to consideration received for e-commerce supply or services rather than consideration received from e-commerce supply or services (as contained in the charging Section 165A).

The difference in language used and therefore the scope of the provisions can be explained better through an example. In a situation where a 3^rd party seller sells a good over a platform for INR 100 and the commission of the platform operator is INR 5, the consideration received for an ecommerce service provided or facilitated by the platform operator should be INR 5. The consideration received by the e-commerce operator, assuming that they are responsible for handling the payment settlement, from the e-commerce supply facilitated by them should be INR 100. However, as set out above, the EL chapter applies only to consideration received for e-commerce supply and not from e-commerce supplies. To that extent the charging provision and the deeming fiction are broader than the scope of the EL chapter itself. Therefore, to that extent the charging provision is arguably inapplicable.

CASE STUDIES

We have examined the potential implications of the proposed definition of ‘consideration received or receivable’ on the basis of the following case studies to further illustrate the impact:

In case study 1, the e-commerce operator is facilitating supply of goods between the buyer and seller. The payment mechanics of the transaction and applicability of Expanded EL are elaborated below:

1. E-commerce operator charging commission from buyer / seller or both: In this case, the buyer makes payment to the seller through the e-commerce operator. On receipt of payment (say INR 100), the e-commerce operator deducts its commission (say INR 5) and pays the remaining amount to the seller (INR 95). Prior to the proposed amendment by the Finance Bill, even on the wordings of Section 165A it was possible to argue that the e-commerce operator was liable to pay Expanded EL only on the amount of consideration (INR 5). However, post the amendment by Finance Bill, the e-commerce operator would be liable to pay Expanded EL on the entire consideration (INR 100) as the definition deems to include consideration for sale of goods irrespective of whether the e-commerce operator owns the goods.

2. E-commerce operator not charging commission from buyer / seller or both: In this case, the buyer makes payment to the seller through the e-commerce operator. On receipt of payment for sale of goods, the e-commerce operator pays the entire amount to the seller (INR 95) without deducting any commission. Prior to the proposed amendment by the Finance Bill, it was possible to argue that the e-commerce operator was not liable to pay Expanded EL as there is no consideration for e-commerce supply or services. However, post the amendment by Finance Bill, the e-commerce operator may be liable to pay Expanded EL on the entire consideration (INR 95) as the definition deems the term ‘consideration received’ to include consideration for sale of goods irrespective of whether the e-commerce operator owns the goods. While the intention appears to have been to cover gross payments, the current reading of the provision (explained further below in the next example) potentially goes beyond that to cover situations where consideration is not received by the E-commerce operator at all.

This is a significant issue since the whole objective of EL was to target the incomes of non-resident platforms which were going untaxed in India. In the above situation, there is no income of the platform to be taxed in the first place. To further, impose the burden of effectively paying taxes on behalf of the seller of the goods, is unreasonable and absurd. This becomes even more pronounced when we take the case of a communication platform as set out below.

In case study 2, the e-commerce operator is primarily a communications platform and not a marketplace which is set up primarily to encourage and facilitate sales on its platform. The buyer connects with the seller through the communications platform (which can either be through messaging, email or directly through the portal). The buyer places order for the products through the communications platform.

In such a situation, let us assume that two users message each other with respect to a transaction and the payment is made directly by the buyer to the seller through a 3^rd party payment service provider which is outside the communications platform. Prior to the proposed amendment by the Finance Bill, it was possible to argue that the communications platform was not liable to pay Expanded EL as there is no consideration for e-commerce supply or services. However, post the amendment by Finance Bill, it is unclear whether Expanded EL would apply despite the fact that the communications platform does not receive any consideration. This is because the language used in the explanation states as follows:

“consideration received or receivable from ecommerce supply or services shall include –

1. consideration for sale of goods irrespective of whether the e-commerce operator owns the goods;

2. consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator”

It is important to note that the deeming fiction firstly relates to consideration received from and not for supply or facilitation of ecommerce supply. Secondly, the deeming fiction states that the term “consideration received” shall include the value…