TAXABILITY ON E-COMMERCE FOREIGN

PAYMENTS

2

The digital space has grown very rapidly in the last few years and is expected to grow

substantially in the near future. Many startups, early stage companies and large

consumer-facing companies use services of foreign service providers, and such companies

are not subject to any taxes in India. Business in the digital domain is done irrespective of the

physical location of the service provider or recipient and it carries a host of tax and

compliance issues which we seek to address in this note.

TAXES AND LEVIES COVERED IN THE NOTE

EQUALISATION LEVY

DTAA and withholding tax (TDS)

Form 15CA/CB filing

INCOME TAX

IGST

OIDAR rules

GOODS ANDSERVICES TAX

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Section 195 of Income Tax Act

■ Section 195 of the Income Tax Act, 1961 is a machinery provision for Tax Deducted at Source (TDS) on sums paid to non-residents;

■ Sub-section (1) of Section 195 read with the second proviso states that, the payments to which TDS would apply cover interest or any other sum chargeable to tax, under the Act.

Reporting of Foreign Remittances – Section 195(6) read with Rule

37BB of the Income Tax Rules, 1962

■ Section 195 (6): The person responsible for paying to a non-resident (other than a company) or to a foreign company, any sum whether it is chargeable under the Income Tax Act or not, shall furnish the information relating to payment of such sum, in Rule 37BB, as per the manner which may be prescribed;

■ The salient features of Rule 37BB are as under:

● Information has to be furnished in relation to any payment to a non-resident, whether chargeable to tax in India or not;

● Reporting needs to be done only at the time of payment irrespective of the fact whether TDS has been deducted in the past or a position has been adopted for not deducting tax;

● Exemption from reporting for payments made by an individual under LRS scheme of RBI.

3

INCOME TAX

Form 15CA/CB filing compliance

Withholding tax (TDS) obligations

Double Taxation Avoidance Agreement (DTAA)

INCOME TAX ACT, 1961

4

Form 15CA (Declaration by the Payer)

● Declaration by the payer furnishing prescribed information in relation to the foreign remittance. It is divided into four parts – A, B, C and D, each of which applies to mutually exclusive situations. The payer has to fill the part that is relevant to their case;

● Form 15CA needs to be furnished electronically and thereafter a signed printout of the said form should be submitted to the AD prior to remitting the payment;

● The form is required to be signed by the person responsible for making the payment. The Tax Department may require the AD to furnish the signed print out form for the purpose of any proceeding under the Act.

APPLICABILITY OF FORM 15CA – PART A/B/C/D

PART A PART B PART C PART D

Applicable if:

Remittance istaxable;

and

Remittance or aggregate thereof does not exceed ₹5,00,000 in FY.

Applicable if:

Remittance is taxable;

and

Remittance or aggregate thereofexceeds ₹5,00,000 in FY;

Order/certificate is obtained under section 195(2)/195(3)/197

Applicable if:

Remittance is taxable;

and

Remittance or aggregate thereof exceeds ₹5,00,000in FY;

CA certificate(Form 15CB) is obtained

Applicable if:

Remittance is not taxable under the Act.

CA certificate(Form 15CB) isnot required

CA certificate(Form 15CB) isnot required

CA certificate(Form 15CB) is required

CA certificate(Form 15CB) is required

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● FAQ on Aggregate Remittance: In case the aggregate remittance of taxable income is envisaged at less than ₹5,00,000 initially and on account of subsequent remittances, if the aggregate value of remittances crosses ₹5,00,000, Part C should be used for subsequent remittances;

● FAQ on Cancellation of Form 15CA: There is an option to withdraw Form 15CA before payment. Form 15CA can be withdrawn within 7 days of submission of the online form. This would also result in withdrawal of Form 15CB as both the forms are linked and there is no separate option for withdrawal of Form 15CB. If Form 15CB is not filed, one can submit revised Form 15CA and then submit Form 15CB with the new acknowledgement number;

● The verification to the declaration under the parts C and D includes an undertaking to pay any taxes (along with interest and penalty) if found as payable. Further, the verification to the declaration in all the parts includes an undertaking to submit additional documents to the tax department, as may be required in relation to the remittance.

Interplay between parts of Form 15CA

Reporting of Payments Taxable under the Act but Exempt under the Applicable DTAA Provisions

● It could be argued that in view of Section 90(2) of the Act, the phrase ‘not chargeable under the provisions of the Income Tax Act’ would include amounts which are exempt under the applicable DTAA, a question arises whether reporting would need to be made under Part C or Part D of the Form 15CA;

● It may be noted that unlike Part D, Part C specifically requires answers to whether the payment in question is not taxable under the DTAA and the reasons for the same. A prudent approach would be to report such payment under Part C of the Form 15CA;

● As the payee’s TRC (Tax Residency Certificate) and Form 10F are fundamental for the application of any beneficial DTAA provision, it would be prudent that the payer obtains it at the time of credit or payment.

6

Form 15CB (Chartered Accountant Certificate)

● Form 15CB is required only if the remittance is taxable and the aggregate value exceeds ₹5,00,000 in a FY and a certificate/order under sections 197/195(2)/195(3) has not been obtained from the AO;

● Once uploaded, Form 15CB cannot be amended or modified . The status of the Form on submission shall appear as “submitted”;

● On the successful filing of Form 15CA - Part C against a particular Form 15CB, the status of the Form 15CB shall update as “consumed”. In case of withdrawal of a Form 15CA against which the Form 15CB was consumed, the status of Form 15CB will change form “consumed” to “withdrawn”;

● One Form 15CB can be consumed for filing one Form 15CA only. Where multiple remittances are to be made, separate Form 15CB and corresponding Form 15CA would need to be filed;

● Whilst a CA certificate is not required in relation to remittances which are not taxable under the Act, it is advisable to obtain it for remittances which, though taxable under the Act, are not taxable by virtue of a beneficial DTAA provision.

CREDIT CARD PAYMENTS

Payments covered under section 195, but involving an AD(eg.: payments by credit card, barter payments, book entries payment)

● The information prescribed under section 195(6) of the Act has to be furnished in respect of taxable as well as non-taxable remittances (excluding 33 payments as in listed in Para 4 are not required to be reported). Barring these, all other payments need to be reported regardless of the mode of payment;

● In this case, it may not be advisable to claim impossibility of performance as these may involve a risk of disallowance u/s 40(a)(i) and also potential penal exposure. Thus, though the BSR Code may not be available, a dummy code may be filled with a view to comply with the requirement

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■ Section 195 (6) read with Rule 37BB (both are elicited earlier in this note) state that:

● Information has to be furnished in relation to any payment to a non-resident, whether or not chargeable to tax in India;

● Reporting would need to be made only at the time of payment irrespective of the fact whether TDS has been deducted in the past or a position has been adopted for not deducting tax.

■ Therefore, even in case the case of auto-debits to credit cards, the amount of the cards are discharged subsequently at specified date and therefore the compliance (under Rule 37BB) for such auto payments should be done at the time of making payment for the credit card bills.

RATE OF TDS

■ Section 195(1) provides for TDS at rates that are in force. Section 2(37A)(iii) states that the rates in force shall mean the rates as specified in Part II of the First Schedule to the Finance Act of the relevant year or the rates specified under the applicable DTAA, as may be beneficial under Section 90(2).

TRC of the payee

■ Section 90(4) of the Act requires every non-resident desirous of claiming DTAA benefit to furnish a TRC issued by the Government of his/her country of residence;

■ Section 90(5) read with Rule 21AB of the Rules, further requires the payee to furnish the information as prescribed in Form No. 10F.

PAN of the payee

● The Finance Act, 2016 has amended section 206AA to provide that effective 1st June 2016 tax shall not be deducted at a higher rate in case of ‘specified’ payments to non-residents not having PAN, subject to prescribed conditions;

● The specified payments include payments in the nature of interest, FTS, royalty and capital gains. In all other kinds of payments, provisions of section 206AA may continue to apply.

AUTOMATIC CREDIT CARD PAYMENTS (AUTO-DEBITS TO CREDIT CARD)

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1. Agreement(s)/contract(s) underlying the transaction;

2. Invoice(s)/Debit Notes being paid;

3. Other correspondence between the parties for determining the exact nature of the payment;

4. A visit to the non-resident’s website to see how they have described their Indian-office operations;

5. Copy of payee’s TRC for the relevant period and Form 10F;

6. In case TRC of the relevant period is yet to be received, a copy of the application filed by the payee for obtaining the same and details of the payee’s tax identification or other unique number in the country of tax residence;

7. Testing of each remittance for taxability in India. For this, it would be advisable to get an expert opinion where a significant sum is involved.

Documentary Proof for Foreign Payments

● The conditions for relaxation have been specified under Rule 37BC which was introduced vide CBDT Notification No. 53/2016 dated 24th June 2016

● To avoid TDS of a higher rate as per section 206AA of the Act, the Rule requires a non-resident payee not having a PAN, to provide details and documents as under:

● Basic information viz. name, email ID, contact number and address in the country of tax residence;

● TRC, if the law of the country of tax residence provides for issuance of such certificate;

● Tax Identification Number (where no such number is available, other unique number by which such payee is identified in the country of tax residence)

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CONSEQUENCES OF NON-COMPLIANCE OF SECTION 195

PARTICULARSSECTION NUMBER

DESCRIPTION

Disallowance of expense Sec 40(a)(i)Disallowance of the particular expenses if the TDS not at all deducted.

Interest on delayed paymentSec 201(1A)

If the TDS is deducted but not paid within timeline, then interest @1.50% per month or part of the month from the date of deduction to date of deposit.

Penalty for delayed payment Sec 221If the TDS is deducted and not paid, then a penalty equivalent to the TDS amount.

Penalty on short deduction Sec 271CTDS deducted short, then a penalty equivalent to difference between actual deductible and deducted amount.

Penalty non-filing of particulars or furnishing inaccurate information

Sect 271 I

Penalty of ₹1,00,000 upon failure to furnishInformation / on furnishing inaccurate information under Section 195(6) of Income Tax Act.

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The Finance Minister detailed in his budget speech that, Equalization Levy is aimed at taxing business-to-business (B2B) E-commerce transactions. Therefore, the scope of the Levy may be expanded to cover a wider range of digital goods and services as time progresses.

Equalization Levy, Finance Act 2016

Background

Equalisation Levy is the tax leviable on consideration received or receivable for any specified service under the provision of as mentioned.

Equalization Levy

● The Equalisation Levy has been defined as tax leviable on consideration received or receivable for any specified service under the provisions of Chapter VIII of Finance Act, 2016;

● The Levy falls under a separate, self-contained code and is not a part of the Income Tax Act, 1961.

Services Covered

The Equalisation Levy would apply at a rate of 6% on the Gross Consideration payable for a specified service.

Online advertisement

Any provision for digital

advertisement space

Any other facility or service for online

advertisement

Any other service which may be notified by the Government

Specified Servicesinclude the following

11

APPLICABILITY

On payment to non-resident not having permanent establishment in India by

A. A person resident in India or

B. A non-resident having a permanent establishment in India for the purpose of specified service in respect of B2B transactions only. Further, Equalisation Levy is chargeable when aggregate amount of consideration for specified services received or receivable exceed ₹1,00,000.

The levy has been effective from 1st June 2016.

A non-resident not having permanent establishment in

India

Who Needs to Comply?

● Every resident person and foreign company (having a PE in India) is required to withhold the Equalisation Levy when making payment to a non-resident service provider;

● The Compliance procedure is similar to the withholding tax provisions already prevalent in India.

A non-resident having a permanent

establishment in India

From 1st June 2016,makes payment

exceeding₹1,00,000 in a year

to a single person for Specified Services

A person resident in India

OR

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CREDIT CARD PAYMENTS

It has observed in various instances that the consideration for the specified services is paid automatically by way of credit or debit cards which are linked to user accounts. This situation would not enable the service recipient to deduct Equalisation Levy before making payment.

Section 166 sub-section (3) of Finance Act, 2016 states that every assessee will be liable to deposit Equalisation Levy even if assessee fails to deduct such levy.

In such a situation Equalisation Levy @ 6% would have to be born by the Service Recipient.

PARTICULARSRULE

PRESCRIBEDFORMS FORREPORTING

TIME LIMIT

Deduct* and deposit the Equalisation levy (Pay such levy to the credit of Indian Government by remitting it into Reserve Bank of India or in any branch of State Bank of India or of any authorized bank).

Deduct* when payment is made or credited, whichever is earlier.

NA NA7th of eachsucceeding

month

Furnishing annual statement by the taxpayer in respect of specified digital services.

Rule 5 Form 1

30 June of the tax yearsucceeding immediately

File Form 15CA – Part D for each remittance which is not taxable. Rule 37BB Form 15CA –

Part D

While making

remittance

HOW TO COMPLY?

13

Consequences of non-compliance by service recipient

Income Tax Act Disallowance :

Disallowance of such expenditure in the hands of the payer.

PARTICULARS SECTION NO.(OF FINANCE

ACT, 2016) DESCRIPTION

Interest on Delay

paymentSection 170

In case of delay in payment of equalization levy to

the credit of central government interest @1% for

every month or part of the month is chargeable.

Penalty for failure

to deduct or paySection 171

a) If assessee fails to deduct Equalization Levy, then

he/she is liable to pay penalty equal to amount of

equalization levy that he failed to Deduct.

b) If assessee deducts equalization levy but fails to

deposit it then he is liable to pay penalty of ₹1,000

for every day during which default continues (capped

at amount of Equalisation levy taxpayer failed to

pay).

Penalty for failure

to furnish

statement

Section 172

In case of failure to furnish return ,assessee shall be

liable to pay a penalty of ₹100 for each day during

which the failure continues.

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IGST ACT, 2017

OIDAR rules and import of services under igst

■ Section 2(17) of IGST Act, 2017 defines online information and database access or retrieval services (hereinafter referred as OIDAR).

■ OIDAR denotes services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated, involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as:

● Advertising on the internet;

● Providing cloud services;

● Provision of E-books, movie, music, software and other intangibles through Telecommunication networks or internet;

● Providing data or information, retrievable or otherwise, to any person in electronic form through a computer network;

● Online supplies of digital content (movies, television shows, music and the like);

● Digital data storage; and

● Online gaming

■ Place of Supply for OIDAR Services as per Section 13(12) of IGST Act, 2017 which iterates place of supply as recipient of services

■ For deeming provision with regards to place of supply refer Appendix – IGST Act

■ Section 2(11) of IGST Act,2017 defines Import of Service as the supply of any service, where

● The supplier of service is located outside India;

● The recipient of service is located in India; and

● The place of supply of service is in India;

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LOCATION OF SUPPLIER AND RECIPIENT OFSERVICE IN CASE OF OIDAR SERVICES

Supplier in India

Supplier to collect and pay IGST/CGST/SGST in India

Recipient in India

Supplier in India

Export of service [subject to fulfilment of conditions of export

of services and deeming provisions of Section 13(2)]

Supplier outside India

Supplier outside India

Supplier outside India

Recipient to pay IGST in India under RCM and avail input tax credit of IGST paid subject to

input credit rules

Recipient outside India

Recipient in India having GSTIN

(Registered Dealer)

Recipient in India NOT having GSTIN

(Unregistered Dealer)

Recipient outside India

Supplier to take compulsory registration under simplified scheme (Form GSTR- 5A) and pay

IGST in India

NO IGST Implication

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CHECKLIST / FLOWCHART IGST

Identify services received as OIDAR services and non-OIDAR services

STEP

01STEP

02STEP

03STEP

04STEP

05

For non-OIDAR services place of supply is not defined under specific subsection i.e. (Subsection 3 to 13) of Section 13 hence we have to make reference to general rule which states that place of supply will be of recipient of service

For OIDAR services place of supply is defined under Section 13(12) of IGST Act, 2017 which iterates place of supply as recipient of service

Make reference to two types of places of supply, firstly for OIDAR services, and secondly for non-OIDAR services

Services procured if falling under definition of import of service/OIDAR rules would be taxable supply and liable to GST (i.e. currently @ 18% in totality) under reverse charge mechanism

17

GST filers prepared by National Academy of Customs, Indirect Taxes & Narcotics has laid down certain tests in order to determine whether a service is an OIDAR service or not.

Service

Whether provision of service mediated by

information technology over the internet or an

electronic network

Whether it is automated and impossible to ensure

in the absence of information technology

OIDAR Service

PDF document manually emailed by provider ✓ Χ Χ

PDF document automatically emailed by provider’s system

✓ ✓ ✓

PDF document automatically downloaded from site

✓ ✓ ✓

Stock photographs available for automatic download ✓ ✓ ✓

Online course consisting of pre-recorded videos and downloadable PDFs plus support from a live tutor

✓ Χ Χ

APPENDIX FOR IGST ACT, 2017

18

Clarification Issued by the CBEC under Erstwhile Service Tax Laws

Relevant under GST

Clarification issued by the CBEC under erstwhile service tax laws relevant under GST CBEC regarding OIDAR vide Circular No. 202/12/2016-5T, in the form of questionnaires, are also relevant for GST and produced below.

What type of services will be covered under OIDAR services?

Clarification:

OIDAR services cover services which are automatically delivered over the internet, or an electronic network, where there is minimal or no human intervention. In practice, this can be

1. Where the provision of the digital content is entirely automatic, e.g., a consumer clicks on the ‘Buy Now’ button on a website when either the content downloads onto the consumers device, or the consumer receives an automated email containing the content;

2. Where the provision of the digital content is essentially automatic, and the small amount of manual process involved doesn’t change the nature of the supply from an OIDAR service All electronic services that are provided in the ways outlined above are OIDAR services.

Deeming provision for considering the location in a taxable territory:

● Where supplier of OIDAR service and receiver both are in India: the place of supply as per section 12(2) shall be location of the recipient.

● Where either supplier or receiver is outside India: the place of supply as per section 13(12) shall be location of the recipient. The location of recipient of service is defined in section 2(14) of the IGST Act.

APPENDIX FOR IGST ACT, 2017

19

However, the explanation under Section 13(12) also makes deeming provision for considering the location in a taxable territory if any two of the following non-contradictory conditions are satisfied:

Explanation: For the purpose of this subsection, person receiving such services shall be deemed to be located in the taxable territory, if any two of the following non contradictory conditions are satisfied, namely :

● The location of address presented by the recipient of service through internet IDs in the taxable territory;

● The credit card or debit card or store value card by which the recipient of services settle payment has been issued in the taxable territory;

● The billing address of the recipient of services is in taxable territory;

● The internet protocol address of the device used by the recipient of services is in taxable territory;

● The bank of the recipient of services in which the account used for payment is maintained is in the taxable territory;

● The country code of the subscriber identity module card used by the recipient of services is of taxable territory;

● The location of the fixed landline through which the service is received by the recipient is in the taxable territory.

APPENDIX FOR IGST ACT, 2017

20

Section 13 of Integrated Goods and Services Tax Act, 2017:

1. The provisions of this section shall apply to determine the place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India.

2. The place of supply of services except the services specified in subsections (3) to (13) shall be the location of the recipient of services, provided that the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services.

3. The place of supply of the following services shall be the location where the services are actually performed, namely:

a. Services supplied in respect of goods which are required to be made physically available by the recipient of services to the supplier of services

b. Services supplied to an individual, represented either as the recipient of services or a person acting on behalf of the recipient, which require the physical presence of the recipient or the person acting on his behalf, with the supplier for the supply of services.

4. The place of supply of services supplied directly in relation to an immovable property, including services supplied in this regard by experts and estate agents, supply of accommodation by a hotel, inn, guest house, club or campsite, by whatever name called, grant of rights to use immovable property, services for carrying out or co-ordination of construction work, including that of architects or interior decorators, shall be the place where the immovable property is located or intended to be located.

5. The place of supply of services supplied by way of admission to, or organisation of a cultural, artistic, sporting, scientific, educational or entertainment event, or a celebration, conference, fair, exhibition or similar events, and of services ancillary to such admission or organisation, shall be the place where the event is actually held.

6. Where any services referred to in sub-section (3) or subsection (4) or sub-section (5) is supplied at more than one location, including a location in the taxable territory, its place of supply shall be the location in the taxable territory.

7. Where the services referred to in sub-section (3) or subsection (4) or subsection (5) are supplied in more than one State or Union territory, the place of supply of such services shall be taken as being in each of the respective States or Union territories and the value of such supplies specific to each State or Union territory shall be in proportion to the value for services separately collected or determined in terms of the contract or agreement entered into in this regard or, in the absence of such contract or agreement, on such other basis as may be prescribed.

APPENDIX FOR IGST ACT, 2017

21

8. The place of supply of the following services shall be the location of the supplier of services, namely:

a. Services supplied by a banking company, or a financial institution, or a non-banking financial company, to account holders;

b. Intermediary services;

c. Services consisting of hiring of means of transport, including yachts but excluding aircrafts and vessels, up to a period of one month.

9. The place of supply of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of such goods.

10. The place of supply in respect of passenger transportation services shall be the place where the passenger embarks on the conveyance for a continuous journey.

11. The place of supply of services provided on board a conveyance during the course of a passenger transport operation, including services intended to be wholly or substantially consumed while on board, shall be the first scheduled point of departure of that conveyance for the journey.

12. The place of supply of online information and database access or retrieval services shall be the location of the recipient of services.

13. In order to prevent double taxation or non-taxation of the supply of a service, or for the uniform application of rules, the Government shall have the power to notify any description of services or circumstances in which the place of supply shall be the place of effective use and enjoyment of a service.

APPENDIX FOR IGST ACT, 2017

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