Guru Gyan
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Guru Gyan

The ‘Discriminatory’ Digital Tax/Equalisation Levy

India defends its taxation on e-commerce companies even after facing criticism for the same from the big tech firms and the U.S trade body.

What happened?

India has defended its 2% taxation on digital companies like Google and Facebook earnings revenues in India without being physically present in the country. Indian Trade Secretary Anup Wadhawan during a news briefing said that if there is an economic benefit from a certain jurisdiction then there has to be some taxation in that jurisdiction.

Why the need to defend?

Because the United States Trade Representative (USTR) has sharply criticized and opposed this digital tax imposed by India and termed as ‘discriminatory’.

The USTR in a report in January said that India’s equalisation levy explicitly exempts Indian companies and states that only ‘non-residents’ must pay the tax, which is discriminatory against the U.S. digital service companies. Not just India, USTR has called out digital taxes imposed by France, Italy and Turkey also as discriminatory.

Equalisation levy or digital tax

Finance Act, 2016 had introduced a new digital tax in the form of an Equalisation Levy aimed at internet advertising providers that earn income from India, and do not have a permanent establishment for tax purposes in India. The bill proposed an equalization levy of 6% on specified digital services which was applicable only for specified payments made for online digital advertisements.

Further in 2020, the government widened the scope of its equalisation levy to include e-commerce sales of goods and services provided by non-resident operators to Indian customers. The equalisation levy is imposed at 2% on the considerations received or receivable by the non-resident e-commerce operators.

And now in Budget 2021, the government provided certain clarifications for the same. The government in its Budget presentation clarified that the ‘digital tax’ or equalisation levy would also apply to global net-based companies even if they do not own the goods or provide the services on their platforms and if any part of the transaction is online.

The clarification also added that royalty and fees for technical services would be excluded. Also, the levy is only on sales in India and does not tax sales outside India.

All in all,
With all the clarifications and India dismissing the USTR’s claims by maintaining its position that the tax is fair, reasonable, and non-discriminatory, it would be interesting to see if this invites any retaliation from the U.S. or the bilateral trade talks between the two nations would give some relief to this matter.

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