India’s OECD tax deal may have revenue implications, say experts

Source: Business Standard

Relevance: Equalisation Levy and Global minimum Tax rate aim to tax digital services at the global level.

Synopsis:

Agreeing to the Global minimum Tax rate will impact India’s Equalisation Levy and create revenue implications.

About the Deal:

India recently joined the OECD-G20 framework for a global minimum tax. But the deal will bring certain challenges to India.

Under the agreed outline of the OECD multilateral solution, a portion of profits of companies with Euro 20 billion revenues and a profit margin above 10 percent would be taxed in jurisdictions where they have sales.

Between 20 per cent and 30 percent of profits above a 10 percent margin may be taxed.

The pact will bring only the top 100 digital companies like Google, Facebook, and Netflix into the global taxation pact. So, this might have revenue implications for India.

What India is demanding?

India and other developing countries were fighting to include companies with at least Euro 1 billion in revenues as against the final proposal of Euro 20 billion revenues and a profit margin above 10 per cent. This will cover at least 5,000 global entities.

Challenges with the deal:

As per the deal, India needs to withdraw the contentious 2 percent equalisation levy on e-commerce operators by 2023. The levy will most definitely go by 2023 if the proposal comes into effect, unless India can think of some other way of augmenting the tax.

• The equalisation levy has a much lower annual revenue threshold of Rs 2 crore (Euro 0.2 million) as against Euro 20 billion agreed by 130 countries at the Organization for Economic Cooperation and Development (OECD).
• India collected Rs 2,057 crore from the equalisation levy in 2020-21, an 85 per cent growth over Rs 1,136 crore in the previous fiscal. But, the OECD deal will not give the same amount of revenue.

The background of the Equalisation levy:

The equalisation levy or EL was introduced at the rate of 6 per cent in 2016 for digital advertising services, which led to a Rs 200 crore collection.

• The scope was widened in April 2020 to impose a 2 per cent tax on non-resident e-commerce players. The scope was further expanded in the Budget 2021-22 by way of clarifications.
• In May, India also notified a revenue threshold of Rs 2 crore and a limit of three lakh users for non-resident technology firms to pay tax in India under new or revised bilateral tax pacts. This is a part of the significant economic presence (SEP) principle. SEP, introduced in the Finance Bill 2018-19.

Challenges with the Equalisation Levy:

• The EL has been a bone of contention between India and the United States, with the latter deciding to impose additional tariffs on a slew of Indian imports, including basmati rice, seafood, jewellery, bamboo, semi-precious stones and pearls, among others.
• However, the tariffs will remain suspended for six months with an expectation of a multilateral solution to the issue of digital taxation.

Suggestions:

India will have to take an aggressive stance to protect its rightful tax base, and need to reach a fair consensus to protect the Indian tax base.