The Indian government faces a dilemma as MNEs could consider moving from the country over the equalisation levy. India introduced the 6% equalisation levy on business-to-business (B2B) online advertisements in 2016 in an attempt to level the playing field between highly digitalised companies and the traditional brick-and-mortar economy.
This decision was followed by a multitude of digital tax measures around the world. The Indian government included an important provision to the levy in its amended 2020 budget.
It came as a surprise to MNEs when the government suddenly broadened the scope of the equalisation levy, effective from April 1, and introduced a 2% levy on e-commerce operators, affecting non-resident e-commerce platforms selling goods and services into and from India. The key criticism from taxpayers has been that the legislation is too broad and requires clarification, which taxpayers still await.
Some taxpayers believe that the legislation will likely chase away companies in a time where India is trying to attract investment to aid the country’s economic recovery.
“The government has to come up with something more specific and they’re running short of time. If they want to cover all the transactions, such as the legislation does now, companies will flee India,” said one senior tax manager at a multinational tech company.
The legislation effectively covers any cross-border transactions, including business-to-customer (B2C) as well as B2B transactions. Taxpayers have noted that the wording is wide enough to cover inter-company transactions, such as royalties and fees for technical services. This will expand the tax and administrative burden for foreign businesses carrying out these activities.
“The law of the equalisation levy is very complex and MNEs will find it difficult to comply,” said Manish Aggarwal, head of tax at Sasken Technologies.
As a result, MNEs in India will have to reconsider their business activity in the country. In addition, companies that are looking to expand will have to weigh up the negatives of operating in India, while the country is trying to attract investment. The country is already regarded by many MNEs as a difficult jurisdiction owing to the burgeoning administrative burden on businesses.
Many other Asian countries are pursuing similar economic recovery strategies through incentives and arrangements, such as Vietnam and Indonesia, making it even more important for India to make itself competitive.
Businesses want certainty and detailed guidance from the government on the equalisation levy before payments are submitted. Many companies are in an awkward position because they have not had any time to prepare and the legislation remains vague, raising doubt over implementation and enforcement.
“There were expectations that the government would have come out with some extensions, but the government has not announced anything formally. First set of payments from next month onwards but lots of questions remain unanswered,” said Vikas Garg, head of indirect tax at Siemens India.
MNEs are also waiting to see whether there is substance to reports that the government was reconsidering the expansion of the equalisation levy. Furthermore, some tax lawyers argue that the equalisation levy is unconstitutional and foreign companies affected could challenge it in court.
The backlash from the business community may have forced the government to reconsider the expansion of the equalisation levy. Whether that will lead to sufficient change is up in the air. India has a knack for introducing broad changes on a whim, making tax executives’ lives rather interesting.
