India to do away with equalisation levy once new global tax pact falls into place
136 countries, including India, have agreed to implement the new system
The government has agreed ‘in-principle’ to do away with the equalisation levy (EL), but the exact time will depend upon when the new international tax agreement for the digital age will become a reality.
On Friday, India along with 135 countries and jurisdiction agreed to implement the new international tax system. This aims to ensure that multinational enterprises (MNEs) are subjected to a minimum 15 per cent tax rate from 2023.
Digital services tax
Also, the arrangement requires no newly-enacted digital service taxes or other similar measures are imposed on any company from October 8, 2021 and until the earlier of December 31, 2023 or the coming into force of the MLC (the Multilateral Convention). As agreed, the modality for the removal of existing digital service taxes and other relevant/similar measures will be appropriately coordinated.
India is one of the countries that levy digital services tax, referred as EL. It was introduced in 2016 and was initially applicable to payments for digital advertisement services received by non-resident companies without a permanent establishment here, if these exceeded ?1 lakh a year. Last, year, it was extended to e-commerce companies. Now, with signing of the new agreement, India is supposed to end this. In response to a query on when the tax would end, a top Finance Ministry official told BusinessLine: “India will remove EL but only when the new agreement is in place.”
Amit Maheshwari, Tax Partner, AKM Global, said that countries like India and France have in the past levied their unilateral taxes just like equalisation levy/digital services tax to cover up the tax loss arising due to digital transactions. This was considered discriminatory by the USTR (Office of the US Trade Representative) as such unilateral levies create burden on large US-based companies. The global consensus on the global tax deal is significant as it will ensure a fair share of tax to countries like India and other emerging market jurisdictions.
“With this consensus, the equalisation levy or SEP which was imposed as a unilateral measure by India on digital transactions will be rolled back and that can also result in corresponding amendments in the domestic tax law (Indian Income Tax Act),” he said.
The proposal
This two-pillar solution will be delivered to the G20 Finance Ministers meeting in Washington DC on October 13 and then to the G20 Leaders Summit in Rome at the end of the month. Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises. It will reallocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether the firms have a physical presence there.
“Specifically, multinational enterprises with global sales above €20 billion and profitability above 10 per cent — that can be considered as the winners of globalisation — will be covered by the new rules, with 25 per cent of the profit above the 10 per cent threshold reallocated to market jurisdictions,” the statement said while adding that taxing rights on more than $125 billion of profit are expected to be reallocated to market jurisdictions each year.
Pillar Two introduces a global minimum corporate tax rate set at 15 per cent. The new minimum tax rate will apply to companies with revenue above € 750 million and is estimated to generate around $150 billion in additional global tax revenues annually. Countries are aiming to sign a multilateral convention during 2022, with effective implementation in 2023.
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