The Indian tax authorities have passed the newly introduced equalization levy (EL) of 2% on non-resident e-commerce sellers (the "E-com EL") who do not have any permanent establishment in India, and a 6% tax applicable to B2B Indian advertising revenue (the "Ad EL"). This legislation was introduced by the Finance Act 2020 and was effective April 1, 2020. It requires every non-resident person or entity selling goods or services in India through online means to pay 2% on their gross receipts collected from customers in India, as well as 6% of their Indian advertising revenues. This "sales tax" is a direct tax on the non-India-based seller. So, the seller must either pass on the 2% or 6% tax to the buyer or absorb it as part of operating costs. Since this is a "sales tax," no foreign tax credit is applicable.
The levy applies to gross receipts from e-commerce supply of goods or services to:
All U.S. sellers (and non-U.S. sellers) selling goods or services via the internet (online sales) to Indian customers, above a $267,000 threshold (total annual sales to India in the prior calendar year), unless the seller already has a taxable branch in India (permanent establishment), meaning the seller's gross receipts from Indian sources is already subject to income tax in India.
The requirement is effective April 1, 2020. Taxes must be paid each quarter and the first due date was July 7, 2020. To comply with these provisions, a U.S. taxpayer must register with the Income Tax Department in India, obtain a Permanent Account Number (PAN) and pay the tax one week after each quarterly end date. They must also file an annual return as applicable to the EL.
Failure to file and pay the EL results in a penalty equal to 100% of the tax the seller failed to pay each quarter, and 12% annual interest on the unpaid balance. This can result in an effective tax rate of 4% or 12% of quarterly gross receipts, plus 12% interest. In addition, there may be prosecution in certain circumstances.
Begin to analyze your gross revenues from India-sourced customers, determine your quarterly tax exposure and decide if you choose to comply with the law. The World Trade Organization has challenged this legislation, but it may be some time before the law is ultimately upheld or struck down. If upheld, the tax penalties for non-filing and non-payment of tax can be significant (4% or 12% tax on the applicable gross receipts).
