Global Economy

Multinationals want clarity on scope of equalisation levy after OECD deal

Multinationals tackling ambiguity around the applicability of the 2% equalisation levy have reached out to their tax experts fearing that the government could expand the scope of the levy through ‘clarifications’ even after India has joined OECD’s (Organisation of Economic Cooperation and Development) global tax framework deal.

The tax reform mandates signatories not only scrap existing unilateral taxes—such as equalisation levy—but also avoid introducing any new ones for the next two-three years.

Multinationals want their tax and legal advisors to provide clarity on whether the government coming out with a “clarification” on equalisation levy can be construed as a fresh levy under OECD’s definition.

In 2020, the government had expanded the scope of the equalisation levy in a bid to tax internet giants’ digital advertising revenues from India to include any purchase by an Indian or India-based entity through an overseas ecommerce platform.

Now the equalisation levy of 2% is also applicable on all online sale of goods or services, any purchase that has been made online, online payments and on even an offer that’s accepted online.

This essentially covers every online transaction, argue tax experts. From goods imported through an ERP, to hotel bookings done from India, or emails that refer to specifications of software development.

Equalisation levy, at 6% was first imposed on cross border digital transactions in 2016.

Many companies had reached out to the government and sought clarification on the issue.

Now the same companies fear that the government could come out with a clarification, increasing the scope of the equalisation levy, despite the OECD deal.

Tax experts say that even increasing the scope through clarifications could result in breach of “spirit” of the OECD deal.

“As per the OECD framework no country can introduce any new unilateral levy or tax after October 8, this year. Governments should not introduce even clarifications that would expand the scope of any levy or tax as it may go against the spirit of OECD’s minimum global tax agreement,” said Ajay Rotti, partner with tax advisory firm, Dhruva Advisors.

“The wordings of the OECD Statement must be honoured by the signatories in the letter and spirit and countries should not play with the words of the statement for widening the scope of existing levies as it would go against the intent of the entire consensus,” added Rahul Garg, managing partner of tax and regulatory consultants Asire Consulting.

OECD had on last Friday brought together 136 countries to accept a deal to ensure that large multinationals pay a minimum tax of 15% on their global incomes from 2023 and those with profits above a threshold will have to pay taxes in the markets where they conduct business.

Apart from the equalisation levy India will have to abolish special economic presence (SEP) or “digital permanent establishment” rules, ET first wrote on October 12.

The new OECD framework would mean that large companies will have to disclose their global revenues and pay taxes on that. India became part of the deal with a hope that it could increase its revenues from taxing large multinationals in the years to come.


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