INTRODUCTION
Equalisation levy is a direct tax which was introduced by Government of India in the year 2016 vide Finance Act, 2016. Equalisation Levy was not a part of the Income Tax Act, 1961 but rather it was introduced in the Finance Act, 2016. Initially the Equalisation Levy was only applicable to online advertisement services, it was because of this reason that it was commonly termed as “Google Tax” since Google was one of the major company which was subjected to this levy. The threshold limit which is set for this levy is Rs.. 1 lakh and at rate which it would have been deducted was 6 percent.
In the year 2020, Government of India vide Finance Act 2020, expanded the ambit of Equalisation Levy to include e-commerce supply and services provided by non-resident e-commerce operators. The rate of this levy is 2 percent of the total supply or service provided to a person. The threshold limit for the levy of this is Rs. 2 crores, in other words, it will be levied only when the aggregate amount of consideration received in the previous year exceeds Rs 2 crore.
BRIEF HISTORY BEHIND THE IMPLEMENTATION OF THIS LEVY
The Indian Government ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting on June, 2019. This allowed the government to implement special taxing laws to tackle the problem of Base Erosion and Profit Shifting (BEPS). The BEPS was one of the steps taken by G20 nations and the same was first published by The Organization for Economic Co-operation and Development (OECD) in its 15-point “Action Plan for Base Erosion and Profit Shifting” which was endorsed by the nations in the G20 Summit of 2013.
India became a signatory to Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting in 7th June 2017 when under the delegation of the then Union Finance Minister, Late Shri Arun Jaitely, India signed the said treaty along with 65 other nations.
AN INSIGHT ON TAX PLANNING OF MULTINATIONAL COMPANIES
It has been often observed that most of the multi-national companies (MNC) are even though head quartered in the United States of America’s famous Silicon Valley, yet it is not the place where the actual parent company is registered. Countries like Ireland, Mauritius, Cayman Islands, British Virgin Island etc. are the places where MNCs choose to register the parent companies, this is done because of the prevailing lower rate of taxes in these countries, which makes these countries tax havens and a perfect destination for registration of the parent company of the subsidiaries, which operate globally.
Generally, the entities located in the tax havens earn the income as royalties from its global subsidiaries and the tax which is to be paid by the holding company is effectively less than what it should have paid from the countries in which it operates. The countries can tax the royalty from the subsidiary but not the income which has been earned by the parent company.
This is a matter of never ending debate as to whether the aforesaid is tax planning or tax avoidance.
TAXATION IN INDIA
Article 265 of the Constitution of India gives sovereign the power to tax only if there exists a statute for such tax levy. It is an undisputed fact that sovereign nations have the right to levy and collect tax but subject to the statute which levies such tax. Government of India can collect taxes on both type of income – accrued or arise in India and income actually received in India.
Multi-national companies often open a subsidiary in India so as to come within the meaning of “domestic company” as per the Income Tax Act, 1961 since the tax rates of a domestic company is less than that of a “foreign company”. Further, as per Double Tax Avoidance Agreement (DTAA), the subsidiary company should have a Permanent Establishment in India, then only the income earned by the subsidiary can be taxed by the Indian Government. Foreign companies that have a Permanent Establishment (‘PE’) or Branch/ Project Office in India are taxable at the higher basic rate of 40%.
While, all these provisions are applicable on only those companies which have a permanent establishment in India, Indian legislation prior to the enactment of Finance Act, 2020 did not tax those companies, which operate in India but do not have a permanent establishment in this country. Thus, bringing such companies and entities into the ambit of taxation in India and subjecting them to pay the Equalization Levy at the rate of 2 percent for consideration above Rupees 2 crores.
THE RAMIFICATION OF EQUALIZATION LEVY ON NON-RESIDENTS
The United States Trade Representatives raised concerns and lodged investigations against India’s Digital Service Tax or Equalization Levy. The United States Trade Representative in its report dated 6th January 2021 found India’s Digital Service Tax discriminatory on two grounds:
1. It discriminates against U.S businesses as it excludes the taxability of this tax among the domestic companies.
2. It does not extend to identical services provided by non-digital service providers.
Indian Government clarified that the levy is not discriminatory on the grounds that:
1. The majority of the entities in the digital market is dominated are from the United States, thus it seems that it is discriminative
2. The exclusion of domestic companies is because the services provided by them are already taxed by the prevailing law of the land.
CONCLUSION
The tax laws of a country is supposed to be in consonance with the existing economic conditions of that country. Sovereign has the right to collect taxes but such collection should be a rational one. Is collecting tax from an entity which operates in India but without its actual presence in India is required? Certainly, it is. But, this should not be full of ambiguity. Prior to this Equalisation Levy, only those entities, be it branch of foreign companies or Indian incorporated subsidiary company of foreign companies, having its permanent establishment were only subject to pay tax, while those companies which did not have its permanent establishment did not pay tax in India for the income arising in India.
While Equalisation Levy or the Digital Service Tax is taxing the digital market, but due to lack of international taxation policy in this sector, it will be cumbersome for countries in both- policy formulation and policy implementation to implement this in an efficient manner. There must exist an international consensus to ensure that while the digital market is taxed, it is not burdened with heavy taxes which results in killing this emerging sector.
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