From India’s perspective, while introduction of Equalisation Levy 2.0 is understandable, the Indian government should consider narrowing the scope of EL 2.0 and announce the required clarifications.
Internationally, the widespread growth in digitisation of business has created challenges in allocation of taxes between market jurisdictions and countries where these companies are headquartered. It is widely perceived that large digital companies pay inadequate corporate tax in countries from where they receive major revenue share. Recognising the need to reform international tax rules for taxing digital companies such that countries get their fair share of taxes, the OECD has been working on proposals for new rules but so far has not arrived at a consensus on the final scope and manner of taxation. Meanwhile, many countries such as France, Italy, Turkey, Austria, UK, Malaysia, Spain etc have either proposed or implemented a unilateral digital tax applicable to digital companies, called as the ‘Digital Services Tax’ (‘DST’).
India was the first country to introduce digital tax called ‘Equalisation Levy’ in 2016 at the rate of 6%. EL 1.0 was payable by Indian residents on online advertisement services purchased from non-resident companies. From 1 April 2020, the scope of equalisation levy has been expanded to include 2% levy on all online sale of goods or services into India by non-resident e-commerce operators (‘EL 2.0’).
Equalisation levy is a unilateral levy imposed under the Finance Act. It is not an income tax and therefore, outside the scope of tax treaties. Recently, the United States Trade Representative (‘USTR’) launched an investigation against countries levying digital tax, including India, claiming that the digital tax imposed unilaterally by the countries is unfair and discriminatory as it is targeted majorly at digital companies in the US. In response, the Indian government submitted that the 2% levy is not ’unfair’ as it is applicable across all non-residents without having regard to any specific jurisdiction and that its purpose is to tax businesses having nexus with India market through digital operations. India expressed its willingness to engage in bilateral discussions with the US on the matter.
US being an important trade partner for India, it will have to be seen if and how EL 2.0 impacts the trade relationship between the two countries. For instance, in retaliation to the French DST, the USTR had announced imposition of 25% tariff on a range of French products and services starting January 6, 2021, thus, allowing time for negotiations between the two countries to resolve the issue. The French government has since suspended collection of DST till December 2020.
The scope of EL 2.0 is too wide to cover all kinds of online transactions. In comparison, the DST in European countries is narrower and covers only specified digital services such as online marketplace, social media platforms, online advertising, etc. Also, various activities are excluded such as intra-group transactions, communication services, regulated financial services. The intention to introduce EL 2.0 was to tax enterprises that thrive on digital environment without establishing physical presence in India. But the manner in which the scope is currently worded, it seems to impact many companies which are merely using standard technology as an enabling medium to undertake their business activity.
Another feature which makes EL 2.0 broader, compared to DST, is the low revenue threshold of INR 20 million as compared to EU DST where the threshold at company level ranges from EUR 3 million to EUR 50 million (i.e. approximately, from INR 260 million to INR 4,350 million) and at group level, EUR 750 million which makes DST applicable only to large multinationals operating in the digital space. Many countries such as France, Italy, Turkey and Spain have declared that DST is an interim measure which will be repealed once a global solution is found at the OECD level. Similar assurance from the Indian government is awaited. On August 3, the OECD submitted a draft blueprint report on Pillar 1 containing a revised and more technically detailed version of the ‘unified approach’ proposed in October 2019. The draft blueprint report notes that agreement on a solution would require inclusive framework members to withdraw all unilateral measures.
Lastly, it is interesting to take note of the recent draft proposal to add new ‘Article 12B’ in the UN Model Double Taxation Convention to deal with taxation of income from automated digital services. It provides source countries the right to collect a withholding tax on gross fees at a rate to be agreed between the treaty partners; with an option to offer tax on net income based on global profitability ratio. While this is a simple and easy to administer proposal, two aspects of caution need to be considered – the agreed rate will have to be low since margins of many companies operating digital businesses are low, and secondly, the success of this model will depend on how many countries are willing to include this article in their tax treaties.
At present, while the globally accepted approach to tax digital economy is underway, digital companies will be required to comply with the unilateral provisions introduced by market jurisdictions in their domestic laws. From India’s perspective, while introduction of EL 2.0 is understandable, the Indian government should consider narrowing the scope of EL 2.0 and announce the required clarifications.
- Shefali Goradia is Partner and Nilisha Jain is Manager, Deloitte Touche Tohmatsu India LLP. Views are authors’ own.