This article has been written by Ayushi Singh, 3rd year student at Dr. Ram Manohar Lohiya National Law University, Lucknow


Rapid digitalization of the economy and evolved business models, coupled with the exceeding dominance of some global giants in the market naturally gave rise to a new a sphere of taxation to eliminate the unfair advantage availed by non-resident companies over domestic players. Cross-border online transactions allow global corporations to utilise tax-havens as places of incorporation for subsidiaries while majorly operating elsewhere for tax benefits or other complex artificial schemes involving licensing of IPR to subsidiaries to ensure little to no taxation despite substantial sales in a country. The Organisation for Economic Co-operation and Development (OECD) in their Base Erosion and Profit shifting (BEPS)conceptualisation, addressed the systematic lacuna, both domestic and international, that allow MNEs to escape or minimize tax liability on the income generated form difficult-to-track cross border business operations/transactions to the detriment of countries, especially developing ones.

BESP Report on Action Plan 1 discussed three different avenues of domestic initiatives for casting the taxing net on e-commerce giants that evade jurisdiction of the market they are exploiting. The approaches included withholding tax, nexus of significant economic presence and equalisation levy. Countries were free to implement any combination of the available options until a global consensus is reached under the OECD and India implemented the last two.

To reconcile the BEPS imperatives with cross-border jurisdictional challenges, India initially introduced Equalisation levy (EL) under Section 165 the Finance Act, 2016(the Act) which is charged at the rate of 6% on the amount of consideration paid to a non-resident without a permanent establishment in India, for ‘specified services’ i.e. services related to online advertisement. Inclusion of Section 165A and 166A to the Act introduced EL 2.0 in the year 2020 with the object of charging 2% levy on the “amount of consideration received by an e-commerce operator” in a transaction for services provided within the territorial limits of India. The minimum threshold is set at INR.2,00,00,000 of sales, turnovers or gross receipts and the obligation to pay the levy is on the e-commerce operator. Moreover, while EL 2.0 has been subject to much opposition from various sectors for procedural as well as policy considerations, even alleging discrimination, the authorities have maintained it to be a temporary solution till a global consensus is reached. This blog attempts to dissect the material defects in the provisions as a consequence of the expansive scope of the taxation base for EL 2.0 and potential conflicts with other Income Tax provisions in their practical context.

Calculation base for EL 2.0

According to S.165A of the Act, the basis of calculating the levy to be charged is the ‘gross consideration paid to the non-resident e-commerce operator.’ This is understandable in case the business model includes the operator receiving the entire consideration in return for the online sale of goods or services on its e-commerce platform/website as the direct owners or service providers. It, however, becomes a matter of concern where the e-operator is simply a “facilitator” of the online transaction and is entitled only to earn a percentage cut out of the entire consideration as their facilitator fee while the remaining consideration is held by it only in its capacity as intermediary. In this subset of business models, the operator retains only their facilitation fee or service charge while the consideration for the service or goods is to be directly transferred to the seller/ service provider.

The provisions, however, do not provide any nuance or explanation to the word ‘consideration” to allow for appropriate taxation of e-commerce facilitators which, according to the authors, should be based only on the commission retained by them. This would result in undue taxation of the facilitator where the levy is unreasonably applied to the whole consideration.

 In the separate case of e-commerce operators retailing or wholesaling on their platforms, regard also has to be paid to the inevitable sales returns and consequent credit notes. It is also recommended to incorporate the concept of consideration based on “net sales” as the basis of calculating the levy. Further the definition of “e-commerce operator” may be different and nuanced depending on the statute or provision concerned as a reflection of the purpose. For instance, the definition under GST does not include a business engaged in transactions involving goods and services produced and owned by it. Thus, with due consideration, the definitions of both “consideration” and “e-commerce operator” may be tweaked to incorporate the practical aspects of business.

Comparative analysis with Income Tax provisions:

The expansive scope of the levy, both in terms of the taxpayer subjects as well as calculation base of the levy, creates zones of clashes between these provisions and those under the Income tax Act, 1961(ITA).

Section 9(1)(i) of ITA deals with provisions related to “income deemed to accrue or rise in India” which puts a tax liability on entities with “nexus” to India in the form of a “business connection” or “permanent establishment” to warrant its jurisdiction. In order for an activity to be called a business connection[i] there must be an element of continuity and it cannot exist in a stray or one-off transaction. In such a source of income based avenue of taxation, emphasis has been laid on figuring out the minute modalities of determining liability which is exclusively based only the income attributable to an entity’s operation in India. Additionally, a similar concept of categorical taxation only on actual profit accrued or source of income basis, separate from a larger transaction or contract, within a jurisdiction through a permanent establishment is recognized in Action 7 of OCED’s BEPS Action plan. As a parallel, EL can be termed a source of income based tax as no tax liability arises by mere instance of residence in a country. EL specifically crafts a space for taxing foreign entities operating and earning profits only through online transactions with no tangible presence. Consequently, EL should also incorporate a more appropriate definition for “consideration”, adaptive to fairly tax entities in cases of e-commerce transactions where the non-resident only provides platform for a facilitation fee.

Moreover, EL 2.0, with its under-defined parameters and uncertainty pervading it, may not be supportive of investment goals. Global giants evade tax liability because of extensively digitalised business models and utilisation of intangible assets. This was countered by introduction of Significant Economic Presence(SEP) via Explanation 2A into Section 9(1)(i) of ITA in 2018. It extended the scope of pre-existing provisions for taxing non-resident businesses only by way of “business connection” or “permanent establishment” which was circumscribed within the limitation of material presence. With the introduction of SEP, taxation has expanded to include non-residents having access to the Indian market and customers, where in such transactions territorial lines are inconsequential given the virtual nature. Notably, only income incurred through such transactions is taxable as opposed to the broader construct of “consideration” based levy. 

Significantly, EL 2.0 comes with a provision which states that non-residents subjected to it will be exempted from tax liability under Section 10(50) of ITA amended by the Finance Act, 2020. Where the seller or service provider utilising the non-resident e-commerce platform, is at the same time also subject to the provisions of ITA, they evade a higher tax bracket by claiming exemption under EL in absence of any clarifications for the same.

The substantial difference in the approach of SEP and EL remains that SEP essentially requires a pattern of continuity in business solicitations in India via digital platforms while EL is applicable to even single transactions provided they are above the specified threshold. This effectively allows the authorities to cast a wider taxation net. However, to the detriment of the non-residents under EL 2.0, they are deprived of the benefits of double tax avoidance (DTA) provisions under ITA since the tax explicitly does not base itself on net-income. On the other hand, provisions such as SEP retain the benefits of DTA Agreements and seem to require treaty modifications between States given their income-based nature. So effectively, EL 2.0 takes away the cross-border advantage for non-resident entities by taxing their transactions and instead it allows Tax Authorities to technically operate without conflicting with existing tax treaties. This might have been the selling point for Indian Parliament to make a move towards EL while remaining treaty compliant.


The all inclusive definition of the targeted assessee coupled with the low threshold has created an unruly situation where the government’s over-reach is obvious. Not to say that attempts to tax service providers who operate across borders without physical presence have not been made. In fact, over the last few years, there is an obvious trend towards gradually dilution of thresholds like “Permanent Establishment” to address the rising challenge of e-commerce. While India adopted the concept of SEP, other countries including Australia, France, and UK have extended their tax regimes to cover cross-border business activities. But, the widened scope of EL 2.0 overlaps with non-resident transactions already subjected to SEP wherein EL takes precedence and exempts the entity from Section 9. This is counter-productive as SEP has better defined contours which would ensure fairer taxation based on profits. It is pertinent to consider the potential retaliatory actions from foreign States because of the friction between this extensive tax regime and International Relations borne out of policy differences in a politically sensitive matter issue like taxation. The objectives outlined in the BEPS action plan and maintained in the Interim measure report of 2018 neither recommended any particular solutions nor purported to provide an exhaustive approach to all taxation avenues created due to digitalisation and e-commerce. So, this move is bound to ruffle some feathers, especially in the context of strain caused by the first levy and the awaited global consensus after these interim measures.

[i] Commissioner of Income Tax, Punjab v. R.D Aggarwal & Co. [(1965) 1 SCR 660: AIR 1965 SC 1526].

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