A controversial levy India imposed four years ago on digital services rendered to Indian businesses by offshore technology firms, leading to a tiff between New Delhi and Washington, has been scrapped.
The Finance Bill 2024 presented by finance minister Nirmala Sitharaman proposes to scrap from 1 August the 2% equalization levy on a wide array of services rendered by offshore tech firms including cloud services and e-commerce services.
The move comes as a big relief to global e-commerce players, especially US-based ones, as many businesses were facing tax disputes on account of this levy, experts said.
India had in 2020 expanded the scope of its equalization levy, first introduced in 2016 on offshore firms hosting advertisements targeted at Indian consumers, to include other e-commerce services by off-shore entities.
According to a report by the US Trade Representative in 2021, which described the expanded form of the levy discriminatory against the US, a large number of services including software as a service, platform services, data-related services, cloud services, financial services, education services and digital sales of a company’s own goods are covered under the 2% levy.
The idea has been to tax payments made to offshore entities by Indian consumers of these services as the technology service providers may not have a physical presence here and therefore the income tax department cannot subject such income earned from India to tax.
The Finance Bill said that some stakeholders raised concerns that the scope of the 2% levy was ambiguous and as a result, lead to compliance burden.
“In view of this it is proposed that this equalisation levy at the rate of 2% shall not be applicable to consideration received or receivable for e-commerce supply or services, on or after the first day of August, 2024,” said the Union budget documents.
The levy which was originally applicable to online advertisements hosted on platforms run by offshore entities was at the rate of 6%. This, however, stays.
Only the 2% levy on other e-commerce services that was rolled out in 2020 which led to friction with the US has been rolled back, explained Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm.
“Since, its introduction from 1 April 2020, the equalization levy on digital services created controversies with respect to classification of services to determine if these would be subject to this levy or could be taxed as royalty or fee for technical services,” said Maheshwari.
“The tax department and foreign companies are not always aligned even if the foreign companies discharged the obligation of payment of this levy. Its removal will put to rest such disputes and will simplify the compliance burden for the foreign companies providing such services,” said Maheshwari.
A Bold Move
Although the USTR had said the levy was actionable under US laws—such as withdrawing trade benefits and imposing duties or import curbs—the two countries agreed on a transitional deal similar to what the US had reached with countries like Austria, France, Italy, Spain, and the UK.
That deal was applicable till a global deal on tax treaty was signed or until the end of March 2024. Since the proposed global tax deal comprising ways of checking tax evasion by digital economy firms (called pillar one of Organisation for Economic Co-operation and Development's (OECD) project targeting tax base erosion and profit shifting ) and a proposal for a global minimum tax rate of 15% (called pillar two) could not be signed yet, the other countries extended the scope of the transitional arrangement till the end of June. India, too, agreed with the US to extend the arrangement till end of June, the finance ministry said on 28 June.
Experts also said that removal of the 2% levy was a bold move. "The provision was very wide and, in many cases, extended even beyond the typical digital business models. This created a lot of ambiguity and confusion,” said Amit Rana, Partner at Price Waterhouse & Co LLP.
Rana explained that since the equalization levy was not a 'tax' under the income tax law, availability of credit for the amount paid under this obligation was a challenge for the income earners in their home jurisdictions. Removal of this levy should ease the compliance burden for many global companies which were doing business remotely with India in addition to reducing their cost burden, said Rana.
Riaz Thingna, partner at Grant Thornton Bharat, said that the withdrawal of the 2% equalization levy was a surprising move as there is no immediate action on the part of the government to introduce domestic legislation on pillar one. Many businesses expected the government to introduce domestic legislation required under the proposed global tax deal.
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