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The Ambiguity Continues To Exist


The Memorandum to Finance Bill, 2021 (Bill) states that “there is a need for some clarification to correctly reflect the intention of various provisions concerning this levy” and thus sets the background for the proposals

One of the most significant amendments proposed to clarify the scope of EL is the introduction of definitions of the term ‘online sale of goods’ and ‘online provision of services’

Section 10 of the IT Act deals with ‘incomes not included in total income’

The Finance Minister presented the Union Budget, 2021, which has by and large been hailed by the industry as a “never before” budget providing a fillip to business sentiments by and large. However, as they say, the devil lies in the details. One important change which emerges from the budget document is the proposed amendments to provisions relating to the Equalisation Levy (EL) under the Income-tax Act, 1961 (IT Act) and the Finance Act, 2016 (FA16).

Unlike last year’s amendments (where the proposals missed a mention in the Finance Bill introduced in the Lower House), this time the proposed amendments are contained in the budget documents itself and provide some guidance on the background for their introduction. The Memorandum to Finance Bill, 2021 (Bill) states that “there is a need for some clarification to correctly reflect the intention of various provisions concerning this levy” and thus sets the background for the proposals. However, while the proposal clarifies some aspects, it raises more questions, while leaving others unanswered. It remains to be seen whether the amendments would provide relief to the trade, or further add to its woes.

Definition Of ‘Online Sale Of Goods’ And ‘Online Provision Of Services’

One of the most significant amendments proposed to clarify the scope of EL is the introduction of definitions of the term “online sale of goods” and “online provision of services”. At present, the terms “ecommerce operator” (ECO) and “ecommerce supply” have been defined, and these terms, in turn, use the terms “online sale of goods” and “online provision of services”, which are not defined. This led to ambiguity as regards the scope of EL. The proposed definitions define “online sale of goods” and “online provision of services” to include one or more of the following activities taking place online:

  1. Acceptance of the offer for sale; or
  2. Placing the purchase order; or
  3. Acceptance of the Purchase order; or
  4. Payment of consideration; or
  5. Supply of goods or provision of services, partly or wholly.

Hence, now, undertaking any one of these activities on a digital or electronic facility or platform owned, operated or managed by a non-resident may likely trigger the levy of EL. The proposed definitions may likely lead to covering within the ambit of EL various businesses which may traditionally not be understood to be e-commerce businesses.

The above issue is more worrisome especially since the term “owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services” used in the definition of the term ECO is yet to be clarified, and the possibility of the Revenue Department seeking to bring in even e-mail ordering within the definition of ECO cannot be ruled out. Hence, it is hoped that the legislature may bring more clarity to the same through further amendments/clarifications.

Definition Of The Term ‘Consideration’

EL is to be discharged by the ECO at the rate of 2% of the “amount of consideration received or receivable by an ecommerce operator” from e-commerce supply or services made or provided or facilitated by it. However, the manner of determination of such “consideration” is at present ambiguous and subject to interpretation. This leads to difficulties especially in determining the amount which should be taxed in respect of ECOs which merely facilitate a supply (market-place ecommerce).

The term “consideration received or receivable from ecommerce supply or services consideration” has now been proposed to be defined to include:

  • Consideration for sale of goods irrespective of whether the ecommerce operator owns the goods;
  • Consideration for provision of services irrespective of whether service is provided or facilitated by the ecommerce operator.

In terms of this newly proposed definition, there is an attempt to link the term “consideration” to the value of the underlying supply of goods and services facilitated through e-commerce, irrespective of whether such goods/services are owned/provided by the ECO. This indicates that the intent of the law is to levy EL on the entirety of consideration which is paid by the person located in India and not just the amounts which are finally earned (received) by the ECO.

For example, in an online accommodation aggregator model (bookings of room made outside India by a person located in India), while the ECO collects the entirety of accommodation amount (charged by the hotel) from the customer, it retains only a fixed percentage thereof (as its income/consideration) while remitting the remainder to the accommodation service provider. In such a case, based on the present provisions, a view could be taken that since only the amount which is retained by the ECO is the consideration received / receivable by it qua that supply.

However, the proposed definition for the term “consideration” would not permit such a view. The online accommodation market-place will post the amendment, be required to pay an EL of 2% on the entirety of the amounts collected by it, including the amounts which will subsequently be remitted to the service provider. Hence, presuming the ECO retains 10% of the amounts collected by it, in effect, an EL of 20% will be charged on the actual consideration earned by it.

While the above appears to have resulted in administrative ease, the potential repercussions on the global tax policy seem to not have been duly considered. From another perspective, in case the ECO seeks to share the burden of the EL with the actual service provider, it would effectively lead to India taxing the income arising from renting of immoveable property,  which is neither located in India nor is such income earned by a person resident in India. The fact that a credit of the EL may not be available in the ECO/supplier’s jurisdiction, further compounds the issue and will likely lead to double taxation.

Addressing Overlap Between EL And Royalty/ FTS 

By way of parallel proposals to amend Section 10(50) of the IT Act and Section 163 of FA16, it appears that the issue of an overlap between EL and royalty or fees for technical services (“FTS”) is addressed. On the one hand, it is proposed to be clarified that exemption under section 10(50) will not apply for royalty or fees for technical services which are taxable under the IT Act read with Double Taxation Avoidance Agreement (“DTAA”).

On the other hand, a proviso has been proposed to be added to Section 163 of the FA16 to clarify that any income which is taxable as royalty or FTS under the IT Act is excluded from the scope of EL, fixing a loophole which could have led to double taxation.

Change Of Date In Section 10(50) Of IT Act 

Section 10 of the IT Act deals with “incomes not included in total income”. Section 10(50) excludes “specified services” under FA 16 and “income from any e-commerce supply or services,” which would be leviable to EL, from the scope of “income” under IT Act. However, perhaps on account of legislative oversight, such exclusion covers only “e-commerce supply or services made on or after the 1st day of April 2021” even while the levy was effective from 1st April, 2020, thereby leading to potential double taxation. An amendment has now been proposed to rectify this date to 1st day of April 2020”. This is a welcome step to remedy the legislative oversight in this regard.


The proposals addressing overlap between EL and royalty/FTS and rectifying date under Section 10(50) are steps in the right direction, providing much-needed clarification in these areas. However, the proposed definitions of “online sale of goods”, “online provision of services” and “consideration”, while definitely clarifying the position in law, will have significant ramifications, requiring businesses to carry out a holistic review of their operations to be sensitive of the additional tax costs.

The article was co-authored by Stella Joseph, associate partner and Niraj Hande, associate manager at Economic Laws Practice.




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