March 12, 2021
Case: Competition Commission of India vs Steel Authority of India & Anr (2010) 10 SCC 744
March 12, 2021

Sailing Through the Uncertain Seas of Taxing the Digital Economy: Equalisation Levy 2.0

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. The systematic lacuna, both domestic and international, allowing 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, was acknowledged by OECD in their Base Erosion and Profit shifting (BEPS) conceptualisation.

To reconcile the BEPS imperatives with cross-border jurisdictional challenges, India initially introduced Equalisation levy in the Finance Act, 2016 [the act] which is charged at the rate of 6 per cent 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. The levy is applicable provided the gross consideration paid to it by a business is in excess of INR 100,000 in a year. In 2020, the act was further amended to introduce a new system of Equalisation Levy 2.0(“EL”), charged at 2%, on the “amount of consideration received by an e-commerce operator” by providing its services in India. This includes non-resident of India if that person accesses the services through IP address located in India. The EL on ‘e-commerce’ operators, is regulated by section 165A and 166A of the act. The tax shall not be levied on companies who have a permanent base of operations within India or where, the EL can be charged under section 165 of the act.

The tax shall be paid “to the credit of the Central Government” for the quarter of the current Financial year. The first payment fell on 30th June till 7th July, 2020. The tax targets any and all e-commerce companies with “sales, turnover or gross receipts” of or above 20 million INR. The author, in this article, undertake to critically analyse the EL 2.0 and its over-extension by the Indian policy makers for creating new tax avenues.

Disputed Nature of the Levy

One of the major contentions over the levy is with regards to its nature. There is an ongoing debate over whether the levy so charged is a system of direct or indirect tax. Even though, certain provisions of Income Tax Act are applicable on the levy, it is still a distinct system governed by Finance Act, 2016. The levy is majorly administered by the Central Board of Direct Taxes (CBDT) in the form of a direct tax i.e. income tax. According to section 2(c) of the Central Boards of Revenue Act, the levy does not fall within the definition of a direct tax. Thus, mere administration as a direct tax does not make the EL a direct tax.

The taxable event of the levy is based off of the ‘supply’ that an e-commerce company makes, which makes it a transaction-based tax. The OECD’s glossary of tax terms defines indirect tax as “Tax imposed on certain transactions, goods or events. Examples include VAT, sales tax, excise duties, stamp duty, services tax, registration duty and transaction tax.” Since, the levy is a transaction-based tax charged on the ‘supply’, as per the definition of OECD, it would constitute as an indirect tax.

There is a lot of ambiguity as to the nature of EL and, there is no clarification by the government as to its nature. This, in effect, makes the levy as of now, without any further clarification by the government, indeterminable. Thus, the levy, in and of itself is a distinct system of taxation, which does not fall under either direct or indirect tax.

The expansive definition of ‘e-commerce’

EL 2.0 is applicable on all non-resident e-commerce companies that deal in online sale of goods and provision of services, facilitation of sale of goods or provision of services or a combination of these two. This is a very broad definition of e-commerce companies and thus, raises a lot of questions as to its validity which makes it problematic for the government to make the companies comply. The definition poses a plethora of challenges for e-commerce companies because it has far reaching implications for transaction that may not fall within the layman’s definition of e-commerce.

There are online businesses that are able to operate virtually without the requirement of a physical transaction, for example: streaming services (Netflix, Hulu, prime video etc.), online games, music and support. These businesses are unconstrained by location and may seek to be covered under the levy on advertisement. The current definition, which fails to specifically mention ‘highly digitized’ platforms, renders the taxation on these businesses vague.

Another major contention is the demand for exclusion of heavily regulated online marketplace of financial services which, as it stands right now, fall within the ambit of the current definition. E-commerce companies, in a representation sent to Central Board of Direct Taxes, asked the government to exclude the aforementioned services from the ambit of the levy. Also, the current definition is vague over the nature of transaction that would attract the EL i.e. the current definition does not specify whether the levy is applicable over business to business transaction only, or it also covers business to consumer transaction as well.

The very low monetary threshold of 20 million INR poses the threat of disincentivising new start-ups from conducting business proceedings in India. This can, in turn, lead to a substantial loss in FDI. New start-ups struggle to make profits and being taxed on their sales makes them not participate in trade at all. India receives a fair share of FDI from non-resident companies and broadening the scope of taxation results in these companies avoiding trade due to the fear of losing revenue.

The inclusion of a clause stipulating IP address located in India creates confusion for the e-commerce companies. This means that a person resident in India, using a non-resident e-commerce platform, to purchase goods or services and get them delivered outside India would also come under the purview of current definition. E-commerce operators will have to develop and maintain adequate digital infrastructure to deal with such IP address uses and also, use of VPN (Virtual Private Network), a common practice among internet users.

OECD defines tax havens as, “a country which imposes a low or no tax and is used by corporations to avoid tax which would otherwise be payable in a ‘high-tax’ country.” The ‘big-tech’ (Google, Facebook, Netflix, Amazon, Apple, Microsoft) have all used ‘shell coroprations’ to shift their profits outside their resident base, resulting in enormous losses to the state exchequer.

In order to shift the focus on these companies the very first step would be to increase the tax threshold from 20 million INR to a high number. For e.g. France, that has a relatively high threshold, which ensures that small and new companies do not suffer due to this tax while the ‘big six’ of the e-commerce industries pay their dues. The purpose of the levy was to prevent ‘profit shifting’ from the “big tech” and having a broad definition does not meet this objective. The tax can be a boon to incentivise permanent establishment of companies that exploit the capitalistic system and avoid paying taxes.

The coverage of digitised business should appropriately align with the global discussion that intends to capture highly digitised businesses. The current definition has the potential to cover any incidental or trivial role played by digital facility. The government needs to clarify that mere use of e-mail or a website to facilitate bookings in overseas hotel, theme parks, hospitals etc, is not covered under the EL. This falls in line with the definition of Online Information Data Base Access and Retrieval (OIDAR) under GST Act which covers the aforementioned services. According to, Bombay Chamber of Commerce, it may be prudent to remove “telecommunication network” from the definition of “online” in section 164 (f) of the act, so as to avoid unintended coverage of transactions brokered over telephone or emails.


The all-inclusive definition of the targeted assessee coupled with the low threshold has created an unruly situation where the government’s desperate over-reach is blatantly obvious. Furthermore, given the extensive scope for potential conflicts between countries borne out of policy differences, the objectives outlined in the BEPS action plan and maintained in the Interim measure report of 2018 never 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.

Accepting the reforms, suggested by the corporations, as discussed above, will reduce the enforcement efforts of the government required for compliance. In light of growing opposition and a lack of global consensus, it would serve the interest of the government to clarify the doubts raised with regards to the levy. Further, narrowing the definition of e-commerce, to suit the BEPS initiative can avoid backlash from the corporations in the form of unnecessary lawsuit in the international forums.






Tanmaya Gupta is a third year student at Dr Ram Manohar Lohia National Law University.

In Content Picture: Picpedia.org







Kindly note that the views and opinions expressed are of the author and not of the Indian Journal of Law and Public Policy.



1 Comment

  1. Shaurya Dev Singh says:

    Har har mahadev. Tanmaya Sir Rocks.

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