11 minute read 2 May 2020
COVID-19 accelerate adoption of the talent marketplace model

Will COVID-19 accelerate adoption of the talent marketplace model?

By

EY India

Multidisciplinary professional services organization

11 minute read 2 May 2020
Related topics Tax COVID-19 Workforce

The current market situation has accelerated the need for agile organizational structures fuelled by agile talent.

With everyone in lockdown mode, organizations and their people across sectors and across levels, have accelerated adoption of online collaboration platforms. While a lot is being said and done to focus on health and safety of people and the potential impact to the economy, sub-consciously, the talent in each organization has adapted to a new way of working.

This transformation enabled by online platforms has created the framework for the gig economy.

What is gig economy?

A gig economy is a digital labour and talent market helping organizations meet their workforce demand for short-term engagements by hiring independent workers via online platforms that connect gig (temporary) worker with the organization.

Talent for short term assignments

A gig worker is not bound by an employment contract rather is engaged on a task-based assignment connected via an algorithmic matching system. The gig workers can work for multiple organizations at any given point in time.

Talent Marketplace

What are the tax and regulatory implications?

For talent marketplace:

  • Taxability

    An online talent marketplace, which qualifies as a non-resident e-commerce operator (ECO), would be subject to Equalisation Levy (EL) at the rate of 2% on consideration received or receivable against e-commerce supplies or services (provided such amount exceeds INR20 million). The income on which such EL has been paid will be exempt from income-tax.

    The non-resident ECO will have to ensure payment of EL to the Government treasury on a quarterly basis and will have to file an annual return to report such amount(s) deducted and deposited with the Government.

    Where online talent marketplace is a resident, the income would be subject to tax as its business income. Taxes would be appropriately withheld under domestic law provisions by the buyer depending on nature of services rendered.

  • Withholding obligations

    To widen and deepen the tax net, government also introduced withholding tax obligation on ECO for sale of goods or provision of service facilitated by it through its digital or electronic facility or platform (@1% on the gross amount paid to the e-commerce participant subject to an exception for individuals/ HUFs in some cases).

    However, if gig workers qualify as employees, withholding would be required to be undertaken as salary payment.

  • GST obligations

    Under GST law, an online talent marketplace, irrespective of whether it is foreign or domestic, is required to collect and deposit Tax Collected at Source (TCS) at the rate of 1% on all taxable supplies made by other sellers in India, where consideration for supply is collected by them.

    In case the service supplied by seller is exempt from GST, there should be no TCS requirement.

    Foreign marketplaces will however need to appoint a person in India to take GST registration (authorized representative). Multiple GST registrations may be required depending on the States from which sellers are rendering services through marketplace.

    Fee/commission earned by talent marketplace from gig workers/buyers may also be liable to GST at 18% (depending on whether the place of supply is in India).

  • Permanent establishment

    In case of online talent marketplaces which qualify as non-resident ECO, depending upon whether workers qualify as dependent or independent personnel, risk from permanent establishment perspective would need to be evaluated.

For gig workers:

  • Taxability

    Where the gig workers are resident under domestic tax laws of India, entire income accrued or received by such gig workers should be subject to tax in India. In case of certain eligible class[1] of gig workers, having a gross turnover less than ₹ 5 million, the presumptive tax mechanism provides for a 50% expense allowance. Consequently, the effective tax rate for such individuals could be lower compared to salary income from employment. Further, in case of double taxation, benefit under the Double Taxation Avoidance Agreement, if any, may be explored.

    Where gig workers qualify to be non-resident under domestic tax laws of India, only income received in India should be subject to tax in India. Benefits under the respective Double Taxation Avoidance Agreement between India and the country of residence of such gig workers should be available.

    The contract/ arrangement between the online talent marketplace and gig workers would need careful evaluation to determine whether the gig workers qualify as dependent or independent workers and whether payment received by such gig workers would be taxable under salary or professional fees. This could influence the preference of such individuals.

  • Labour laws/ social security benefits

    Applicability and consequences under labour laws, social security regulations, minimum wage guarantee, etc. would need to be evaluated depending upon whether gig workers are resident or non-resident and whether such gig workers qualify as ‘employees’, which would in turn depend on factors such as control over a gig worker, supervision and right to initiate disciplinary action.

  • GST implications

    In case a gig worker has an aggregate income of INR2 million[2] and below, there is no requirement of GST registration.

    Registered gig workers will be required to discharge GST at applicable rate, on services rendered to buyers through talent marketplace, provided place of supply of such services is in India. GST compliances would also need to be undertaken.

    1% TCS collected and deposited by the talent marketplace will be available as credit to the seller.

For organizations availing services of gig workers:

Deductibility and withholding: Payments made by organizations to platform operators should be deductible as business expense, however, such payments would be subject to withholding depending on whether the talent marketplace is resident or non-resident.

GST Implications: GST registered buyers should be eligible to take input credit of the GST charged by the seller or talent marketplace.

What are the legal implications on talent marketplace model?

For talent marketplace:

  • Recognition under Code of Social Security, 2019 (Code): The code recognises ‘gig workers’ and ‘platform workers’ and stipulates framing of welfare schemes for such workers. The talent marketplace may be required to make contributions in this regard and undertake compliances, once the code is notified.
  • Terms of engagement agreement: Prolonged term of engagement, right to terminate, supervision or control by platform operator may accrue status of an employee to a gig worker thereby entitling the worker to employee benefits under Indian laws. Hence, the engagement agreement needs to be drafted carefully.
  • Non-compete/ solicit: Non-compete, non-solicit clauses may need to be drafted appropriately, considering ability of gig worker to work on various platforms.
  • Confidentiality: Stringent confidentiality obligations regarding information belonging to platform operator and/or customers may need to be expressly enumerated.
  • Intellectual property: Right of ownership over intellectual property related to work product may become a challenge and may be mitigated by expressly stipulating in the engagement agreement.
  • Compliance in multiple jurisdictions: Compliance with varied laws of different jurisdictions as well as industry specific laws may be required.
  • Data privacy laws: The talent marketplace, as well as the gig worker, may be required to comply with stricter data privacy laws while collecting, handling, storing or processing information.
  • Dispute resolution: Unlike a traditional industrial dispute that may be resolved by conciliation or negotiation, any dispute arising between the platform operator, gig worker and/or customer will be governed by their respective contracts/ terms of service and will be subject to consequent litigation.

For gig workers:

  • Health and Safety:  Considering gig workers will not perform their work out of a fixed workplace, applicability of health and safety laws such as respective shops and establishment acts, sexual harassment laws may become a challenge. 
  • Compensation in case of accident:  The applicability of laws providing compensation to gig workers in case of accidents is yet to be tested in courts.

What are the regulatory implications on talent marketplace model?

  • Intermediary/payment aggregator guidelines: In India, RBI has issued intermediary or payment aggregator guidelines, applicable primarily on marketplaces who are collecting any payments from buyers on behalf of sellers. Said guidelines stipulate the opening of separate bank (nodal) account and timelines within which the amount should be credited to bank account of sellers.  Similar guidelines in other jurisdictions needs to be checked.
  • FDI guidelines on e-commerce on service marketplace: At present, regulators have not taken a consistent position on applicability of FDI related regulations in case the platform operator is an FDI entity in India. Hence, clarity on applicability of FDI guidelines would be critical.
  • Transactions with platform operator in one jurisdiction and both buyer and seller in same but different jurisdiction: Where the talent marketplace is overseas, and both the other parties are in India, there could arise a likely scenario where a rupee transaction is getting routed through overseas channel involving foreign currency and the same could pose a challenge under payment and settlement guidelines and FEMA. Similar challenge can also arise in a scenario when the platform operator is in India and both the other parties are overseas.
  • Receipt of payment on behalf of non-resident: Collections by payment operator in India on behalf of non-resident seller could be challenge under FEMA regulations and specific RBI approval may be required.
  • Applicability of import and export guidelines: In case where any of the three participants are located overseas, cross border payments would tantamount to import or export of services and hence, import/ export guidelines as prescribed by RBI would need to be followed. In addition, applicability of third-party payment guidelines would also need to be analysed.
  • Reporting mechanism: Presently, RBI does not stipulate any reporting mechanism for the export/import of services (other than ‘software’ related exports/ imports). Hence, reporting mechanism in relation to such export/ import of gigs may be required to be designed to regulate this model. 

Should organizations in India migrate to a talent marketplace model?

Organizations can take advantage of the gig economy to drive their diversity and inclusion agenda. While such movement would bring certain challenges on one hand but alongside provides various benefits in improving operational efficiencies and reducing costs.

  • Pros

    • On demand workforce: Organizations can tap on idle hours among the talent pool by assigning them to different projects/ workstreams/ teams with shortage of manpower. It provides a much more effective and efficient talent pool to perform on projects and tasks.
    • Promoting diversity and inclusion: Companies can take advantage of the gig economy to get access to diversified and untapped talent and engage with specific talent communities for business collaboration. Such platforms also enable differently abled talent to also access job opportunities in a fair and transparent manner.
    • Flexibility and improved productivity: Migrating employees to a Talent marketplace model provides greater flexibility, diversified experience and continuous learning opportunities to the workers and alongside competitive advantage to the organizations.
    • Controlled costs: Having a talent marketplace instead of employees on payroll, can provide greater flexibility to re-allocate various costs associated with social security, labour laws, long service rewards based on the number of hours utilised.
    • Manage uncertain business climate: In times of business uncertainties, organization can manage the risks of employee layoff.
    • Improved employee satisfaction: Given that the revenue model for gig workers is directly linked to their efforts, it would result in improved employee satisfaction and lesser resentment.
  • Cons

    • Loss of employee status: An employee migrated to a talent marketplace shall become ineligible for social benefits such as insurance, gratuity, medical benefits, provident fund etc.; and shall not have any employment-related rights provided under various labour laws.
    • Exposure to litigation: Unlike employees that are protected against litigation under the cover of the organization to which they belong, a gig worker may be exposed to litigation for deficiency of services.
    • Novation of contracts: The organization will have to enter into new engagement contracts setting out detailed and strict terms of engagement in lieu of existing employment agreements.

While there are challenges in implementation and regulating a gig economy, it has the potential to be the next big revolution in employment and workforce outlook. The current market situation has accelerated the need for agile organizational structures fuelled by agile talent. Therefore, large organizations, will begin their transition towards a gig economy.

The immediate step, however, would be to create an internal talent marketplace within the organization, to make sure that people can be deployed and utilized more effectively and efficiently. This would enable greater efficiency without the challenges and complexities of transitioning from an employment agreement to an engagement agreement.

It is however entirely up to corporations, legal specialists, lawmakers and workers’ associations to start evolving the model, to keep pace with such shifts in their talent and labour market.

(This article is written by Ajit Krishan, Partner and Tax Talent Leader, EY India. Other EY senior tax professionals who have contributed to the article include Ayush Moodgal, Kapil Manoch and Komal Grover, and Nishant Arora from PDS Legal.)

Summary

Gig economy has the potential to be the next big revolution in employment and workforce outlook.

About this article

By

EY India

Multidisciplinary professional services organization

Related topics Tax COVID-19 Workforce