Equalization tax revenue is growing, but it won’t last

BENGALURU/NEW DELHI : India’s collections from the Equalization Tax, or so-called Google Tax, jumped nearly 90% in the year ended March to almost 4,000 crore, thanks to better compliance, economic stimulus and increased scope of the tax.

However, the impressive growth could be short-lived, with a compromise pact India signed with the United States taking effect on April 1.

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Digital royalty

India will phase out the 2% digital tax on non-resident entities including Netflix, Facebook, Adobe, Google and Microsoft under the deal. This will protect India from retaliatory tariffs of up to 25% from the United States on a host of Indian products.

The digital levy has seen collections touch 3900 crore in 2021-22 after the last installment deadline of April 7, against 2,057 crore collected a year earlier, according to data viewed by Mint.

India’s IT hub, Bengaluru, represented 1,898 crores, or half of the overall equalization levy. Hyderabad, which is also home to big IT players, accounted for a quarter of collections in 953 crore. It was followed by Delhi and Mumbai with collections of 706 crores and 233 crores, respectively.

Overall direct taxes, which include personal income tax and corporation tax, STT and equalization levy, amount to 14.1 trillion in 2021-22, 49% more than the previous year and 3.02 trillion above budget estimate. The equalization tax was introduced at 6% in 2016 for digital advertising services, resulting in a Collection of 200 crores that year.

The scope was expanded in April 2020 to impose a 2% tax on non-resident e-commerce businesses and further expanded in the 2021-22 budget through clarifications. She indicated that the equalization levy would cover the e-commerce supply or service when an activity takes place online, including acceptance of offer to sell, placing of order, acceptance of order , the supply of goods or the provision of services, partial or full payment of the consideration, etc.

Queries emailed to CBDT on Tuesday went unanswered until press time.

The pact with the United States means that from the current financial year, New Delhi will not be able to retain the full collections under the equalization levy, but only as much as agreed under a tax agreement of the OECD signed in October. Under the arrangement, companies will be able to accrue the benefits in the form of credits for tax paid beyond what is allowed under the OECD tax pact signed by 136 countries last year.

Experts said that might not translate into much revenue for India, given the limited scope of the global tax. The global digital tax deal would only cover tech giants with revenues of €20 billion (the top 100 companies) and a profit margin above 10%, while the 2% equalization levy is applicable to non-resident e-commerce players with an income of 2 crores.

The calculation rules on the global tax pact are still awaited. Therefore, the Central Board of Direct Taxes (CBDT) will only work out the formula to calculate the tax due to India after that.

“While the broad outlines of the proposed tax regime for the digital economy were made public last year, the fine print of the rules and how the proposed Multilateral Convention (MLC) is negotiated and ratified by individual nations needs to be discussed. seen. The equalization tax and other unilateral digital tax measures will be phased out by countries once the new MLC comes into effect,” said Suranjali Tandon, tax and sustainable finance expert and assistant professor at the National Institute of Public Finance and politics. According to a study by Tandon, the interim gains that will accrue to India are “modest” and may even lead to losses for India from current revenues.

E-commerce businesses that fall within the scope of the equalization tax include Alibaba, Adobe, Uber, Udemy, Zoom, Expedia, Ikea, LinkedIn, Spotify and eBay. The OECD’s multilateral two-pillar solution gives countries including India the right to tax digital players such as Microsoft, Google, Facebook and Netflix, in addition to setting a “global minimum corporate tax” of 15%. The agreement aims to ensure that large multinational digital entities pay more taxes in the countries where they have customers or users, regardless of where they operate.

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