The New Digital Tax- An Element of Surprise?
India is a significant player in the digital tax negotiations. Even during the coronavirus outbreak, India has been putting efforts to change the way digital business models are taxed in India.
What is “equalization levy”
The equalization levy was introduced in 2016. It was originally designed as a 6% on gross revenues from online advertising services. In the financial year 2017–2018, the revenue from the equalization levy was INR 550 Cr (USD 73.4 million). Only non-resident businesses are subject to the tax.
The expansion
India announced on March 23 that its tax aimed at foreign digital companies, the “equalization levy,” will be expanded. The new expansion will apply 2% on revenues of e-commerce operators and suppliers. This change is applicable from April 1. This change expands the equalization levy from online advertising to nearly all online commerce done in India. The change is for businesses that do not have a taxable presence in India.
Who will it be applicable to
This will impact those companies that don’t have a base in India but sell their goods here. Any overseas platform that streams, advertises, or sells goods to an Indian IP address will be taxable. The levy would be imposed on those companies that have a turnover or sales of over INR 2 Cr (USD 267,000) in the previous year. Facebook, Google Amazon, eBay, and many more will be affected by the tax.
Not a part of Income Tax
The equalization levy is essentially a tariff and is not based on ability to pay. Businesses with higher profit margins on their digital business with India will face a lower marginal tax rate than businesses with lower profitability. The 2% revenue tax equates to a 20% income tax if a business has a 10% profit margin in India. This compares to the statutory tax rate of 22%. The lower a business’ profit margin, the higher the marginal tax rate. Equalization levy may also add to the cost of operations for foreign companies. They may not get credit for the equalization levy in their residence country or avail any favorable treaty benefits.
It is definitely an element of surprise.
The equalization levy essentially operates as a tariff on foreign-provided digital goods and services The significant economic presence (SEP) test can create challenges in minimizing double taxation. This might lead to international friction. If every country chose its own way of defining nexus, there would be an overlap in taxation where two countries think they have the right to tax the same income.
