EQUILISATION LEVY
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The Equalisation Levy, commonly referred to as the ‘Google tax,’ is imposed to create a level playing field between domestic and foreign e-commerce companies in terms of taxation. Introduced in 2016, this levy stands at 6% and applies to e-commerce firms generating revenue from Indian customers despite lacking a physical presence in the country.
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The levy is applicable only when annual payments to a non-resident service provider for online advertisements exceed ₹1 lakh. However, it is not imposed if the service is availed for personal purposes rather than business or professional use.
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In 2020, the government amended the Finance Act, 2020, broadening the scope of the Equalisation Levy to include non-resident e-commerce entities engaged in selling goods or providing services online. Under this revision, a 2% levy was imposed on such transactions.
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The United States strongly opposed this tax, labeling it as “unreasonable and discriminatory,” as it exempted Indian companies while targeting foreign firms. Due to these concerns, India decided to withdraw the 2% levy in 2024, although the 6% levy remained in place.
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Apart from the Equalisation Levy, India also introduced the concept of Significant Economic Presence (SEP) to define a business connection for non-residents. SEP applies to foreign businesses with a considerable digital or economic footprint in India, even in the absence of a physical establishment, provided their transactions exceed a specified threshold
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Modifications have been introduced regarding the assessment of undisclosed income uncovered during search and seizure operations. A new term, ‘Total Undisclosed Income,’ has been added to specify that such proceedings aim solely at identifying and penalizing unreported earnings.
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The Bill provides a definition for virtual digital space, describing it as any digital environment that enables users to interact, communicate, and conduct activities using computer technology. This includes email servers, social media platforms, online trading and investment accounts, remote or cloud servers, and digital application platforms.
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Virtual digital assets, such as cryptocurrencies, have been classified as property, making them part of an individual’s capital assets, alongside existing categories such as immovable property.
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The updated Bill grants tax authorities the power to override access controls of computer systems and virtual digital spaces, including online trading and investment accounts, cloud servers, and other digital platforms, during search and seizure operations
The government states that both the Equalisation Levy and Significant Economic Presence (SEP) are in line with India’s commitment to the Base Erosion and Profit Shifting (BEPS) Action Plan formulated by the Organisation for Economic Co-operation and Development (OECD).
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As per the OECD’s official website, Base Erosion and Profit Shifting (BEPS) refers to tax strategies employed by multinational corporations to exploit gaps in tax regulations, shifting their profits to jurisdictions with little or no taxation, thereby reducing their tax liabilities.
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The OECD/G20 BEPS Project provides governments with frameworks and tools to curb tax avoidance, ensuring that corporate profits are taxed in the countries where the underlying economic activities occur and where value is actually generated.
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BEPS Action 1 addresses the significant challenges posed by the digital economy, aiming to develop a globally accepted solution. According to the OECD’s policy paper, an ‘Equalisation Levy’ is suggested as a potential approach to mitigate direct tax concerns arising from digital business models.
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In October 2021, India, the United States, and other members of the OECD/G20 Inclusive Framework reached an agreement to implement a two-pillar strategy to manage tax complexities linked to the expansion of the digital economy.
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The global tax deal’s two-pillar solution comprises:
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Pillar One, which involves reallocating a portion of profits to the jurisdictions where businesses operate.
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Pillar Two, which introduces a minimum tax and a subject-to-tax rule to ensure fair taxation
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The Organisation for Economic Co-operation and Development (OECD) is an international organization that works to promote economic growth, trade, and global development through policy coordination among member countries. Established in 1961, the OECD has 38 member countries, primarily from North America, Europe, and the Asia-Pacific region.
Key Functions of OECD:
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Policy Analysis & Recommendations: Provides research-based insights on economic policies, taxation, education, and trade.
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International Taxation Standards: Leads initiatives like Base Erosion and Profit Shifting (BEPS) to prevent corporate tax avoidance.
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Global Economic Monitoring: Publishes reports such as the OECD Economic Outlook and Better Life Index to assess economic trends.
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Sustainable Development & Governance: Supports environmental policies, digital economy frameworks, and corporate governance standards
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For Prelims: Organisation for Economic Co-operation and Development (OECD), Base Erosion and Profit Shifting (BEPS)
For Mains: GS III - Economy
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Previous Year Questions
1.With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct? (UPSC CSE 2018)
1. It is introduced as a part of the Income Tax Act. 2. Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the “Double Taxation Avoidance Agreements”. Select the correct answer using the code given below : (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2 |
