indias-equalization-levy

Context: The USTR (United States Trade Representative) is initiating a probe into the imposition of digital taxes on firms like Facebook, Netflix and Google in the EU and nine countries, including India, under the equalization levy, even as India witnesses increasing investments. 

About Equalization levy or Google tax:

  • It was introduced in India with the intention of taxing the digital transactions i.e. the income accruing to foreign e-commerce companies from India. 
  • It is aimed at taxing (B2B) business to business transactions.
  • It is levied at 6% on payments made to offshore platforms hosting online advertisements, it will be taxed only at 2% on e-commerce transactions.
  • Equalisation Levy 2.0: The Equalisation Levy introduced by the Finance Act 2016, was charged at 6% on certain online advertising and related services. 
  • The Finance Act 2020 amended the Finance Act 2016, introducing a new Equalisation Levy at 2% on the consideration received/receivable by an e-commerce operator from the following transactions (e-commerce supply or services):
    • Online sale of goods owned by the e-commerce operator; or
    • Online provision of services provided by the e-commerce; or
    • Online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
    • Any combination of the above-mentioned activities
  • The levy is applicable on consideration received by the e-commerce operator on the above transactions from a:
  • Person resident in India
  • Non-resident, where the:
    • Sale of advertising, which targets a customer who is resident in India, or a customer who accesses the advertising though an IP address located in India; and
    • Sale of data, collected from a person who is resident in India or from a person who uses an IP address located in India
    • Person who buys goods or services, or both, uses an IP address located in India.

Thus, the levy captures online sales of any goods or provision of any services by or through a non-resident e-commerce operator.

Rationale behind: The basic motive behind Equalisation Levy is to prevent the technology companies from shifting profits offshore to tax havens.

  • Foreign firms with permanent establishments are taxed at the rate of 40%. As companies like Facebook, Google did not have any permanent establishment in India, their income could not be taxed.
  • Tech giants or e-commerce companies benefit from the Indian digital economy’s yearly growth  by generating revenue from outside the country of residence. 
  • The levy also helps tap overseas companies providing digital services in India and accordingly alter double taxation avoidance agreements with various countries.

Concerns:

  • Burden on Indian firms: Indian startups are requesting reduction in the equalization levy on the advertising revenue that overseas firms generate from India as the burden is shouldered by local startups and SMEs who advertise on these platforms. 
  • Double taxation: It could discourage foreign firms from indulging in activities in India as they might not be liable for a tax deduction in their home country and can face double taxation. 

In its current form, the levy is deemed widely worded and requires more clarity as to what transactions need to be taxed by the government, as it brings thousands of online transactions under its scope.

Image Source: Economic Times