Equalization Levy on Digital MNCs may Go Only in 2-3 Years

India will abolish the equalization levy imposed on multinational digital companies such as Google, Facebook, Netflix and Amazon among others only after a new mechanism to allocate revenues of such entities among countries under a proposed global tax deal comes into effect.

 India gets about Rs. 4,000 crores through the equalization levy, which will have to be withdrawn as part of the global tax deal finalized by the Organization for Economic Co-operation and Development (OECD) on Friday.

G20 finance ministers will take up the tax deal at their meeting on October 13.

Finance minister Nirmala Sitharaman will attend the meeting.

The equalization levy of 2-6% is imposed on the turnover of companies such as those cited above that otherwise do not pay taxes in India. “We will withdraw it only after the new tax regime comes into effect,” a senior government official told ET. India has also opposed a move by some developed countries such as the US to provide credit in lieu of equalization levy till the new tax regime comes into effect.

India cannot suffer revenue losses in the intervening period until the contours of the framework are finalized, said another government official.

The new regime is expected to come into effect only by 2023-24 after the final details are thrashed out.

While India can continue to imposed an equalization levy till the proposed global regime is rolled out, no new measures can be introduced under the tax now. India has gradually expanded the scope of the levy first introduced in 2016.

The equalization levy of 2% of revenue exceeding Rs.2 crore applies to ecommerce companies that do not have a permanent establishment in India. This is in addition to a 6% levy on payments for digital advertisement services introduced in 2016.

Experts say there could be more deliberations on the proposed digital levy as the proposed threshold for invoking the global tax is still quite high.

“Thought the understanding is that countries will withdraw their digital taxes over the next two years, however, considering that the threshold levels for invocation of new global tax rules are quite high, to ensure that India/other countries in a similar situation are not at a disadvantage, there are likely to be more deliberations on this subject and that would lay the framework for withdrawing of equalization levy in India,” said Vikas Vasal, national leader tax, Grant Thornton Bharat.

The framework has two pillars.

The first proposes multinational enterprises with global sales above 20 billion and profitability above 10% will have to allocate 25% of their profit above the 10% threshold to markets they derive revenues from.

Pillar two introduces a global minimum corporate tax rate set at 15%. The new minimum tax rate will apply to companies with revenue above 750 million and it’s estimated that this will generate around $150 billion in additional global tax revenues annually.

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