The USTR is initiating a probe into the imposition of digital taxes on firms like Facebook, Netflix and Google in the EU and nine countries, including India, under the equalization levy, even as India witnesses increasing investments. Is India right? Mint explains.

Why is there a need to tax the digital sector?

The Indian digital economy’s yearly growth is faster than the global economy, so it is important to address the challenges around taxation of digital transactions. Tech giants or e-commerce companies such as Google and Facebook benefit from this growth by generating revenue from outside the country of residence. They were not required to pay taxes until  2016  as  the performance of the requested services were not executed in India. Foreign firms with permanent establishments are taxed at the rate of 40%. As these companies did not have any permanent establishment in India, their income could not be taxed.

How does India tax the niche digital space?

In 2016, India implemented the ‘equalization levy’ of 6% aimed at taxing B2B transactions with respect to digital advertising, on the gross consideration of more than 1 lakh per year received by foreign non-resident companies for services provided to an Indian firm or a firm with a physical establishment in the country. It aims to equalize tax component between the domestic and foreign non-resident e-commerce company. The levy also helps tap overseas companies providing digital services in India and accordingly alter double taxation avoidance agreements with various countries.

Under scanner

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Under scanner

Through what means is the equalization levy collected?

The burden of paying the equalization levy, which is often called the ‘Google tax’, to the central government, falls upon the Indian company or a non-resident company with a physical establishment in India. The mandate, in this case, is that the concerned company must withhold a 6% levy from the payment made to the non-resident firm.

What are some of the major concerns?

Indian startups, other stakeholders are requesting cancellation or reduction in the equalization levy on the advertising revenue that overseas firms generate from India as the burden is shouldered by local startups and SMEs who advertise on these platforms. Critics suggest it could discourage foreign firms from indulging in activities in India as they might not be liable for a tax deduction in their home country and can face double taxation. It could also cause them to leverage control of digital space and shift tax burden to India.

What additions were made in FY21 Budget ?

In FY21 Budget, the government widened the ambit of the google tax to include a levy which taxes non-resident, foreign e-commerce operators at the rate of 2% plus surcharge on the amount of consideration received/receivable over 2 crore to the operator. In its current form, the levy is deemed widely worded and requires more clarity as to what transactions need to be taxed by the government, as it brings thousands of online transactions under its scope.

Jhoomar Mehta is a Delhi-based development finance consultant.

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