Equalization Levy and Union Budget 2024

Equalization levy or Google Tax is partially abolished by Union Budget, 2024. The genesis of this tax in India started in 2016 and its ambit was expanded in 2020 and again narrowed in 2024. Let us explore its journey from 2016 onwards.

1.??? Necessity: With the ever-expanding digital transactions and their wide-ranging significance for the economy, the Indian government introduced the equalization levy also known Google Tax in 2016. The intention was to cover income arising from ecommerce transactions to foreign entities and bring that under tax net. The traditional physical presence-based rules were not adequate to tax these transactions.

2.??? 2016: ?The government of India accepted one of recommendations of BEPS (Base Erosion and Profit Sharing) Action Plan of OECD. That year’s budget had provision to impose tax on advertisement hosted on platforms run for Indian consumers by offshore firms. The rate of tax was 6%. The conditions were (a) payment is made to non-resident service provider (b) total payment in one year to one service provider must be exceeding Rs. 100,000/-

3.??? 2020: ?the scope of equalization levy was expanded to include the following services:

-????? any provision for digital advertising space or facilities/services; or

-????? Selling goods to Indian residents, or

-????? Users accessing services/goods through Indian IP addresses.

The rate was 2% of gross consideration.

Certain exclusions were like :

-????? Non-resident having permanent establishment in India and the services is related thereto.

-????? Total consideration is Rs. 1,00,000/- or less

-????? The services were not intended to be used for profession or work

-????? Exemption under Section 10(50) to avoid double taxation

-????? The income is chargeable as fees or royalty for technical services

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4.??? Dispute: From the start, there were litigations on the classification of services or taxing as royalty or fees for technical services. In due time, the levy included software as service, platform service, data related services, cloud service, financial services, education services, digital sales of company’s own assets. All these led to further litigations

5.??? Global Tax Deal: There is the proposed global tax treaty which will take care of tax on digital services. The global tax deal is going to include:

-????? Ways of checking tax evasion by digital economy firms (Pillar One of OECD)

-????? Proposal for a global minimum tax rate of 15% (Pillar Two).

The global tax deal has not yet been signed.

6.??? Spur for abolition of equalization levy: There were constant frictions between USA and India over this. Till the time, proposed global tax deal is signed or March, 2024, two countries made a transitional arrangement but that also expired in June.

7.??? Budget 2024 - Partial Abolition: Union Budget has abolished the equalization levy of 2% which was effected from April, 2020 onwards.? However, original equalization levy of 6% on offshore firms hosting advertisements for Indian consumers still continues and is applicable. Even partial abolition has given big relief to the US based technology firms.

?8. Impact of partial abolition:

a)??? Less compliance burden

b)??? Increase in foreign investment by simplifying tax regime.

c)??? Reduction in litigation due to less tax disputes allow business to focus on growth.

d)??? Encourage digital economy while boosting innovation and competition in India’s digital Market.

In case, you are dealing with online digital transactions, you need any support or have any query regarding compliances, valuation and international taxation, you may like to connect with us.

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Abhiinarayan Mishra FCA, FCS, LL.B, IP, RV; Partner, KPAM & Associates, Chartered Accountants, New Delhi ; +91 9990013755; +91 9910744992; [email protected] ; [email protected]