The pursuance of the elaboration of the EL provisions has raised many questions, and various explanatory issues. While the Finance Act 2021 has provided clarity on some of the concerns raised by various stakeholders, this article covers other issues that still need to be addressed under EL 2.0.
Interaction between EL and Royalty/Fees for Technical Services (FTS):
Classification of income as royalties/fees for technical services (FTS) or business income has long been the subject of litigation. Royalties and FTS are subject to withholding tax on an aggregate basis ie the total amount of royalties/FTS. However, if an enterprise has a permanent establishment (PE) in another country, then such income is taxable as business profit on a net basis, i.e. after claiming allowable expenses.
In a situation where the taxpayer considers a transaction covered by EL provisions, and it is described as royalty/FTS by the tax authorities during assessment or subsequent litigation by the courts, the present provisions are silent by the taxpayer. On treatment of EL already paid.
The question is whether the EL paid by the enterprise will be allowed as a credit against the tax liability arising on account of tax liability in the form of royalty/FTS or will be refunded to the taxpayer. Also, if it is to be refunded, what is the mechanism for claiming such refund.
Non-availability of Foreign Tax Credit (FTC)
The question whether the ECO would be eligible to claim FTC of the EL paid would depend on the local tax laws in the home jurisdiction. It is worth noting that the taxes covered under the respective Double Taxation Avoidance Agreements (DTAAs) entered into between India and abroad are specifically defined and generally do not cover EL. Hence, it is likely that tax credit may not be available for EL paid in India, as EL is introduced as a separate chapter in the Finance Act and is not a part of the Indian Income Tax Act, 1961 (ITA) .
In the case of countries that do not have India’s DTAA, if the ECO’s home country jurisdiction recognizes EL as a type of direct tax and gives the ECO the right to claim the FTC, the ECO may not claim it. may be enabled. Where EL 2.0 is not reliable at home, it will be a sunk cost in the hands of the non-resident ECO.
Applicability to inter-company transactions and reseller arrangements
EL 2.0 provisions do not provide any exemption for inter-company/intra-group transactions. There are differing views on whether inter-group services will be covered by this levy, especially in a situation where there is no mark-up. There may be cases where the digital facility is maintained for commercial purposes, i.e. services are provided on cost plus markup basis and there may be cases where the unit
The other group recovers only the cost incurred in maintaining such facility from the institutions. There may be cases where an entity within a group is only collecting and distributing costs for certain digital services received by the group entities (including third parties). The current scope of EL 2.0 is broadly described and may cover such inter-company transactions, provided they qualify within the definitions of ‘ECO’ and ‘e-commerce supply or services’ as provided in the EL laws. Accordingly, such cross charges of inter-company/intra-group support services need to be carefully considered.
Technical challenges in locating IP addresses
Transactions between two non-residents, where either the market is located in India, or the IP address is located in India, are covered under EL 2.0. It can cover the transaction of purchase of goods or services by a non-resident tourist using an Indian IP address on a non-resident operated e-commerce platform. Implementation of EL on such transactions purely based on IP address can be a challenge for various stakeholders.
Meaning of the term ‘digital or electronic facility or platform’
Another major issue is around the scope of the term ‘digital or electronic facility or platform’ – neither the EL law nor the ITA define or interpret the term.
According to Merriam Webster’s Dictionary:
Digital means ‘composed of data exclusively in the form of binary digits’.
Electronic means ‘of or relating to a medium (such as television) by which information is transmitted electronically’.
Platform means ‘computer architecture and devices using a particular operating system’.
Each definition is referring to automatic or minimal human intervention.
OECD BEPS Action Plan 1 observed that “e-commerce platforms typically operate web stores where products are displayed and shoppers can place their orders…” in its report ‘Introduction to Online Platforms and their transition to digital transformation. role’. describes an online platform as “… a digital service that facilitates interaction between two or more distinct but interdependent sets of users (whether firms or individuals) interacting through the service via the Internet provides”. Therefore, a view may be possible that the expression ‘digital’ or ‘platform’, in the context of the EL 2.0 provisions, refers to a market that facilitates exchange between different types of persons who would otherwise interact with each other. could not do the transaction.
In the absence of any definition, the term can be interpreted in a variety of ways and could potentially cover the ubiquitous digital communication device such as email or call. There is a need to clarify the scope of the term digital or electronic facility or platform to remove the existing ambiguities.
Definition of the words ‘goods’ and ‘services’
The terms ‘goods’ and ‘services’ have neither been defined under the Finance Act nor the ITA. This leads to the lexical issue on the scope of the term ‘goods’ and ‘services’. A clarification may be issued in this regard to address the concerns faced by the taxpayers.
Conclusion
India has gained traction as an investment destination with a large consumer base. Foreign investors have also welcomed the recent steps taken by the government on the tax and regulatory front. However, the future of EL 2.0 depends on India’s adoption of OECD Pillar 1 and 2 amendments, requiring clarity in the EL 2.0 law currently in force. The FAQs on various issues discussed above can help taxpayers to take proper position, ensure proper compliance and avoid unfair litigation.
Vikas Vasal is the National Managing Partner – Tax at Grant Thornton India LLP
Siddharth Sipani contributed to this article.
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