India Modifies & Expands Its Digital Tax
At the end of March, the Indian government announced that it would review and expand its equalization levy, which was first set up in 2016 to target foreign digital tech companies.
In its original iteration, this tax applied a 6 percent surcharge on gross revenue from any online advertising sales, accruing roughly $73.4 million during the fiscal year of 2017-18.
According to Tax Foundation, with this expansion, India’s digital services tax will put in place a 2 percent levy on “all online commerce done in India by businesses that do not have taxable presence in India.”
More specifically, this tax, which kicked in on April 1st, applies to nonresident digital tech companies operating in the country that sell goods or services worth more than $267 thousand.
Furthermore, Sandeep Bhalla and Prashant Bhojwani of Dhruva Advisors write in International Tax Review that “the levy shall not be applicable where the e-commerce operator has a PE in India and such supply/services are effectively connected to such PE (as such non-resident would be subject to tax in India) or where the sales, turnover or gross receipts of the e-commerce operator from such e-commerce supply is less than INR 20 million during the financial year.”
Alongside this new version of the equalization levy, the Indian government issued a new nexus test, one that, according to Tax Foundation, establishes that “income of nonresident businesses can be attributable to India for digital transactions by nonresidents in India above a payment threshold or systematic and continuous business solicitation and user engagement in India using digital platforms.”
American Tech Companies React to India’s Equalization Levy
Upon this decision and facing uncertain times as a result of Covid-19, American tech giants like Google and Facebook are trying to have this tax deferred for at least six months.
Most of these companies were surprised by the announcement of the new-and-improved equalization levy, as there had been no signs of it coming into effect.
According to undisclosed sources, Reuters reported that “executives from top technology companies got together on conference calls organised by U.S.-India business lobby groups…and decided to seek a deferment of at least six months.”
One source explained that “Google is particularly concerned that it will not be able to swiftly identify countries where advertising arrangements were in place to target Indian users, increasing technological and compliance requirements.”
Several trade associations led by many of the American tech giants penned a letter that was sent to US Trade Representative Robert E. Lighthizer urging the Trump administration to enter discussions with the Indian government to explain that the equalization levy as it stands is “highly discriminatory…on foreign companies.”
In this letter, as reported by the Indian Times, the associations involved wrote, “The Indian tax represents the broadest framing of a unilateral tax on e-commerce firms that we have seen to date, and runs directly counter to the Indian Government’s commitment to reaching a multilateral solution in ongoing negotiations at the OECD on the taxation challenges of digitalization to the global economy.”
“Given the uniquely problematic features of the tax, the immediate and widespread negative impacts on U.S. companies, the Indian Government’s failure to consult with industry, and its imminent entry into force, we would greatly appreciate your near-term engagement to seek its withdrawal,” they added.
In a separate action, the Internet and Mobile Association of India (IAMAI) asked the government to do away with the tax as “it requires companies to change its internal systems and billing mechanisms and would burden the industry at a time when it is struggling due to the Covid-19 pandemic.”
Many analysts believe this recent iteration of the equalization tax is a result of the Indian government’s need to boost revenues to deal with the global impact of the coronavirus.
Indruj Rai, who is a Partner at Khaitan & Co., told Reuters, “The timing of the introduction of the levy appears to be an attempt to increase revenue collections during the pandemic.”