Digital service tax explained: India backs out of equalisation levy after global tax agreement kicks in

• India has agreed to back out of the 2% Equalisation Levy it imposed on foreign companies providing digital services.
• The US has also agreed to do away with the sanctions it imposed on India to challenge the tax levy.
• A new global tax agreement has been made that will ensure that multinational companies pay at least 15% tax in the country they are operating in.

While India has agreed to back out of 2% digital service tax, which was levied on foreign companies for all the revenues generated from digital services offered in India, the US has also decided to do away with the sanctions it has imposed on India to challenge the tax levy.

What is the digital tax scheme?

The central government in its Finance Bill of 2020-21, imposed 2% digital service tax on trade and services of foreign e-commerce companies such as Amazon and Walmart-owned Flipkart and others having an annual turnover of ₹2 crore or more.

The expanded equalisation levy became applicable from April last year to a range of digital services, including non-resident e-commerce operators who are involved in online sale of goods and provision of services.

As most of these foreign companies are American, US Trade Representative felt that this was a discrimination against American firms and violated the principles of international tax law. The US government imposed a tariff of 25% on goods imported from India in July this year, but it was rolled back soon after.

India first imposed a 6% equalisation levy in 2016, but this was restricted to online advertisement services by foreign companies.

How will it benefit India?

In October, the G20 summit and the Organisation for Economic Co-operation and Development meeting saw an international agreement on new global taxation rules. This includes that multinational firms have to pay at least 15% of their total revenue in each country they are operating in. This would mean that companies like Microsoft, Google, Amazon, etc, must pay taxes for its operation in India.

What does it mean to India?

While the US backed out of the tariff, India is yet to stop the levy as the global tax rules are yet to be implemented. However, India and the US have reached an agreement that will count the Equalisation Levy as a credit against future taxes. Those credits will be accounted for from April 1, 2022, until either March 31, 2024, or whenever the global taxes are sorted.

Although the US Department of Treasury has hailed the deal with India, the Indian government has not expressed any opinions on the same. Even the tech-giants like Amazon, Google and others are mum on the latest tax rules that will impact them.

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