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MNCs Reach Out to Tax & Legal Advisors for ‘Clarity

Multinationals facing ambiguity around the applicability of the 2% equalization levy have reached out to tax experts on concerns that India could expand the scope of the tax through ‘clarifications’ even after New Delhi joined a deal hammered out by the global industrial bloc.

Signatories to the OECD (Organization of Economic Cooperation and Development) tax reforms are required to not only scrap existing unilateral taxes, such as equalization levy, but also avoid introducing new levies for the next 2-3 years.

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

In 2020, the government had expanded the scope of the equalization levy 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 equalization levy of 2% is also applicable on all online sales of goods services, any purchase 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 booking done from India, or emails that refer to specifications of software development.

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

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

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

Tax experts say 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 honored 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. S-ET

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