Equalisation Levy Amendments – Is It Adding Fuel To The Fire?

The budget of 2021 has widened the scope of EL, which may attract heat from other countries

Equalisation Levy Amendments – Is It Adding Fuel To The Fire?
Equalisation Levy Amendments – Is It Adding Fuel To The Fire?
Harshit Khurana & Aanchal Jain - 26 February 2021

The Equalisation Levy (‘EL/ Levy’) introduced in 2020 has been a reason for concern for the entities stationed abroad (non-residents) for quite some time. EL of 2 per cent was imposed on ‘e-commerce supply or services’made or provided or facilitated by an ‘e-commerce operator’ (being a non-resident). The e-commerce operator was made responsible for paying Levy. The terms ‘e-commerce operator’ and ‘e-commerce supply or services’ as used in the new Levy, were defined very widely and had the potential to cover a wide range of transactions, which in common parlance are not considered as e-commerce transactions.

On numerous occasions, representations were filed by the stakeholders to get some clarification and exclusions from the applicability of this new Levy. Budget 2021 was seen as a ray of hope for much needed clarifications/ changes on this front.

As expected, Budget 2021 did propose some changes/ clarifications to the existing provisions. However, did it douse or ended up adding fuel to the raging fire?

Let us analyse the budget proposals for EL and answer this very question

Proposed amendments

Clarification in the meaning of ‘E-commerce supply or service’

In the existing provisions, it is not clear as to which activity should happen online to constitute e-commerce supply or service.

The budget proposal clarifies that if one or more of the following activities happen online, it will constitute e-commerce supply or service:

  • acceptance of offer for sale; or placing of purchase order; or acceptance of the purchase order; or payment of consideration; or supply of goods or provision of services, partly or wholly’.

Impact analysis of the above amendment

Much to the surprise of all the stakeholders and tax experts looking for relief measures, the amendment has emphatically widened the scope of the levy. Post the amendment, EL can potentially be made applicable even if only payment is made online with the rest of activities happening offline.

In today’s business world, when almost all payments happen via online mode, the amendment has the potential to cover even the traditional brick-and-mortar business in the ambit of EL.

Even the existing provisions, without this budget proposal, did not seem to contemplate such wide scope.

Was that ever the intent of the equalisation levy provisions when they were initially introduced?

EL provisions find their origin from Action Plan 1 of the OECD’s project to curb base erosion and profit shifting. The action plan had suggested measures to tax digital businesses who escape the tax net in the market economies. EL was one of the suggested measures in the action plan.

The intent behind equalisation levy as highlighted in the action plan was to tax non-residents who have a significant presence in India via digital means without attracting the rigour of existing permanent establishment provisions. The intent was never to tax traditional brick and mortar, business models.

The budget proposal clearly puts the above intent up for a toss.

Is there still a way through which the non-residents conducting business through non-digital means can still get out of the clutches of EL?

EL is applicable only if a non-resident qualifies as an e-commerce operator.

An e-commerce operator has been defined to mean a non-resident who owns, operates, or manages a digital or electronic facility or platform for the online sale of goods or online provision of services, or both.

What constitutes “digital or electronic facility” has still not been clarified in the budget 2021. Accordingly, there lies a possibility to argue that the non-resident selling goods physically without any active platform such as a website or digital application, does not qualify as e-commerce operators. However, a detailed analysis of the facts of a particular case needs to be carried out to examine the strength of said argument.

Clarification on the value on which EL is to be charged

In the existing provisions, there was ambiguity around the value on which facilitators of e-commerce goods or services should pay EL. Whether EL should be paid on the entire sale consideration or only on the facilitation fee (commission) which is income for such facilitators?

As only the commission amount is the income of the facilitators, they wanted amendments clarifying that EL is payable only on the said amount and not on the entire sale proceeds.

Contrary to the expectations and much to the detriment of e-commerce facilitators, the proposed amendment clarifies that EL is to be charged on the entire sale/ service consideration and not only on the facilitation fee.

Clarification on applicability of EL if income is chargeable as royalty or (Fee for Technical Services) FTS

The Budget proposal clarifies that if an amount is chargeable to income-tax as royalty/FTS, then EL is not applicable. Therefore, now the overlap between EL and FTS/ royalty taxation has been proposed to be resolved. Also, now it is not possible to argue that once EL is applicable, tax on royalty/ FTS is not to be paid.

The implication of retrospective amendments in EL

It is important to note that the above amendments are applicable retroactively from 2020-21. Therefore, for transactions undertaken in the last 10 months, the impact of amendments will have to be evaluated. It may also invite corresponding interest and penalty liability. Considering the significant impact of amendments, it will have huge ramifications for businesses.


The budget of 2021 has widened the scope of EL. This may also attract more heat from other countries, especially the US, in the form of trade retaliation as already contemplated in the US Trade Representative’s report.

Further, there are still many aspects of EL which are uncertain. It is necessary that before the enactment of budget proposals, amendments are proposed to the budget proposals to avoid hardship to the e-commerce players and also the traditional businesses. A detailed clarification on the scope and coverage of EL is definitely the need of the hour.

The authors are Harshit Khurana - Senior Associate, & Aanchal Jain - Associate, Lakshmikumaran & Sridharan Attorneys

DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.