WIDENED SCOPE OF EQUALIZATION LEVY ON DIGITAL TAXATION

Non-Resident e-commerce operators have been avoiding tax constantly by strategically shifting profits from a higher tax jurisdiction to a lower tax jurisdiction even though the consumer base is higher in India. This led to a little or no corporate tax payment in India. Despite having a significant level of economic activity in the country, certain companies forgo paying tax in India as they lacked the permanent establishment status.

Since 2016, there was a levy of 6% tax which was payable on gross revenue which is incurred from online advertising services from the foreign digital companies. Through the Finance Act 2020, the Indian government expanded the scope of equalization levy from the online advertising to revenues that are generated by non-resident e-commerce operators and suppliers which are operating in India.

With effect from April 1st 2020, India has adopted a digital service tax (DST) of 2% on all e-commerce operators and suppliers based in India which do not have any kind of taxable presence such as Amazon, Microsoft, Alphabet.co, Apple, Facebook etc. This has widened the scope of equalization levy in India.

After the 2%, DST was introduced, USA has launched an investigation which mainly focused on the discrimination of US companies in India, retroactivity and unreasonable tax policy levied on the company, further it also focused if it is diverging from norms reflected in the International Tax System.

India’s response to the US investigation said that the purpose of the levy is to ensure greater competitiveness, fairness and to exercise the ability of the Indian government to tax the businesses that have close nexus with the Indian market to their digital operations.

Further India reassures the United States that the equalization levy is entirely consistent with India’s commitment under WTO and International Taxation Agreement.