India may have to let go of equalization levy once OECD BEPS framework comes into force

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The G-20-OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS), which India has adopted, may force it to forego equalization levy, as this particular tax on some global tech companies was meant to be a temporary measure, analysts say.

India, along with most G-20 and OECD members, adopted the BEPS inclusive framework on July 1, outlining a consensus solution to address tax challenges arising from the digitalisation of the economy.

The proposed solution consists of two components – Pillar One which is about reallocation of additional share of profit to the market jurisdictions and Pillar Two consisting of minimum tax and subject to tax rules.

Parts of the BEPS framework, especially related to ‘pillar two’ are nearly identical to the G-7 global minimum tax plan. In fact, the BEPS framework can be considered an extension of the global minimum tax plan, with developing and poorer nations involved as well.

What next?

What has been agreed to is just a framework, and some significant issues including share of profit allocation and scope of subject to tax rules, remain open and need to be addressed. Technical details of the proposal will be worked out in the coming months and OECD expects a consensus agreement to be reached by October.

“The principles underlying the solution vindicates India’s stand for a greater share of profits for the markets, consideration of demand side factors in profit allocation, need to seriously address the issue of cross border profit shifting and need for subject to tax rule to stop treaty shopping,” the Finance Ministry had said in its statement on July 2.

Read: Exclusive | Stage set for bigger India-US clash on Google Tax after new G7 tax plan

Pillar one seeks to fairly tax multinational tech companies which operate across multiple jurisdictions but may not necessarily have physical or intellectual property in all of those markets, thus making it difficult to tax them.

The proposal has been a carve-in principle wherein a company with $20 billion global sales, making more than 10 percent global profit, is considered to be making ‘super-normal’ profit.

“If you are making a super-profit, then 20-30 percent of that excess profit will be reserved for allocation among the market countries. Which means India will get a right to get part of that amount,” said Sumit Singhania, Partner at Deloitte India, told Moneycontrol.

"As a matter of principle, it is a big vindication for many of the developing countries like India who have been all along saying that existing nexus rules requiring physical presence, had become outdated given the change in technology and the way business is conducted," S. Vasudevan, Executive Partner at Lakshmikumaran & Sridharan said.

Market countries like India had complained that multinational corporations were falling out of the tax net simply because they didn't have a physical presence in the country despite earning heavily here, he added.

What happens to Equalization Levy?

As a temporary measure while negotiations were going on, OECD had suggested various measures for countries to tax big tech companies and equalization levy was one of them, which India chose, Deloitte’s Singhania said.

“It was meant to be a temporary measure. The global deal is predicated on the fact that once the BEPS framework comes into force, then those countries will have to withdraw their unilateral measures,” he said.

The equalization levy - also known as google tax - applies to non-resident e-commerce operators. While it applied only to digital advertising services till 2019-20 at the rate of 6 percent, the government widened the scope to impose a 2 per cent tax on non-resident e-commerce players from 2020-21. It covers players including Adobe, Uber, Udemy, Zoom, Expedia, Alibaba, IKEA, LinkedIn, Spotify, and eBay.

The government's earnings from the equalization levy almost doubled to Rs 2,057 crore in FY21, up from Rs 1,136 crore in FY20. The levy collection had continuously grown over the years. It stood at Rs 338.6 crore in 2016-17, Rs 589.4 crore in 2017-18 and had reached Rs 938.9 crore in 2018-19.

“Once the inclusive framework comes to a decision on how the new comprehensive tax framework will be created and implemented through possibly another multi - lateral Instrument signed off and ratified by all relevant countries, independent levies or taxes imposed by other nations would have to give way,” said Hitesh Gajaria, Senior Partner at KPMG India.

"India has earlier made its stance clear that as and when a global arrangement is worked out to everybody's satisfaction, it is willing to end the unilateral equalization levy," he said.