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Digital Taxes | Uncertainty shrouds India’s equalisation levy

The OECD’s recent decision, which could address the tax challenges arising from the digitalisation of the economies, puts India in a tight spot 

July 13, 2021 / 03:50 PM IST

On July 1, the Organisation of Economic Co-operation and Development (OECD) adopted a high-level statement containing an outline of the possible solution to address the tax challenges arising from the digitalisation of the economies. India, which is a signatory to the statement, has been consistent in its stand to equitably tax the digital economy.

With the advent of the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government in 2014, India’s pitch for accelerated digitalisation was evenly matched with its quest to tax the growing digital economy, primarily driven by the fact that despite being one of the largest markets, most of the technology giants did not pay income tax in India.

India’s First Move

While a consensus eluded the major nations on the appropriate manner of taxation of the digital economy, India, introduced a new concept called the equalisation levy (EL) in the 2016 Budget. India and Israel were among the earliest countries to unilaterally levy a digital tax on the foreign companies. India levied a 6 percent tax on the B2B online advertisement revenues of the foreign e-commerce companies.

On the indirect tax front, the government started levying service tax (and later GST) on various cloud and electronic services rendered by these foreign companies in India.

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Equalisation Levy 2.0

With a view to monetise the growing digital transactions further, via Budget 2020, India proactively (and unilaterally) expanded the scope of equalisation levy to charge a 2 percent tax on e-commerce transactions carried out by foreign companies in India. The EL2.0 taxed various forms of online sales and digital services, including digital platform services, software-as-a-service, etc.

The official stand of the government is that the EL is not income tax but a tax on the digital transactions and creates a level playing field between foreign and Indian companies. This was done to disable non-ecommerce operators from avoiding paying any tax by claiming tax treaty benefits, which is available for income tax.

US Cries Foul

Meanwhile, the United States initiated investigation against India for imposition of digital tax, under Section 301 of the Trade Act of 1974. Their 2021 report finds India’s levy of digital tax “discriminatory”, “unreasonable” and burdens or restricts US commerce. The US now threatens to impose retaliatory tariffs against India.

This is not the first time the US has raised concerns over India’s taxation policy. In 2019, then US President Donald Trump called India “the king of tariffs” over its levy of high customs duties on imports. The tariff war that followed impacted India’s steel and aluminium exports. At the WTO, the US challenged various export subsidies (such as Merchandise Exports from India Scheme (MEIS)) which were granted by India to Indian exporters. Even though India challenged the WTO’s negative order before the appellate body, it has withdrawn the MEIS scheme.

If the US imposes retaliatory tariffs, India could be on the back foot again.

Many countries such as France and Italy have followed India’s example to go ahead and unilaterally levy digital tax, with a view to raise revenue from the increasing digital transactions.

A majority of jurisdictions claiming new source taxing rights are market countries of the US-based digital multinationals. The US is trying hard to protect its own tax base, as data-rich, high-consumption economies such as India strive to increase their tax base. There was, therefore, felt a need for consensus-based decision on the subject.

As per the recent high-level statement, the OECD has agreed on two key elements to address the tax challenges arising from the digitalisation: (a) ensuring MNCs pay a minimum tax of 15 percent; and, (b) reallocation of additional share of profits qua the tech companies to the market jurisdictions. This is to ensure that digital companies operating in multiple countries pay taxes in all countries where they provide services. The profit allocation rules, which is a key element of the deal, is yet to be finalised.

If finalised, all countries will have to abolish digital services taxes. This would mean that India would also have to abolish its equalisation levy.

The Road Ahead

India has issued a cautious statement — it is in favour of a consensus solution, at the same time, the solution should result in allocation of meaningful and sustainable revenue to the developing and emerging economies. A broad-based and neutral tax policy is the need of the hour.
Kumar Visalaksh is Partner at Economic Laws Practice. Views are personal.
Arihant Tater is Senior Associate, Economic Laws Practice. Views are personal.
first published: Jul 13, 2021 01:16 pm

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