What is the equalisation levy?
It is a 6% tax that has to be deducted from payments over ` 1 lakh made by domestic companies to firms that are not based in India. The tax will be applicable on online advertising services and deductions will have to be paid to the government every month with effect from June 1.
What is the wider global move?
The equalisation levy emanated from the OECD/G20’s base erosion and profit sharing (BEPS) project formulated in 2013. BEPS refers to the tax planning strategies that exploit gaps and mismatches in tax rules to make profits disappear or to shift profits to location where there are minimal taxes so that the overall corporate tax paid is little or nil.
But why is it called base erosion?
The term refers to the erosion or depletion of a country’s tax base when corporates shift their profits to low-tax jurisdictions. This happens because a country can levy corporate income tax only on revenues booked by companies in its jurisdiction.
According to OECD, annual global revenue losses from BEPS are estimated to be between $100240 billion. It also observed that BEPS tilts the playing field in favour of tax-aggressive companies, misdirects FDI, and reduces financing of needed public infrastructure.
So equalisation levy has been imposed to curb tax evasion?
In a way, yes. Online advertising services are dominated by platforms such as Google, Facebook and Amazon as they make up for a huge chunk of internet traffic. In order to fetch these eyeballs Indian and as well as overseas companies advertise on them. Companies can book these ad revenues in a country where the tax rates are low and skirt paying taxes in India.
This will also apply for India companies such as Flipkart, which is registered in Singapore. According to Mint, Flipkart makes $1 million (`6.7 crore) in ad revenues a month, making it one of India’s biggest digital ad platforms. The equalisation levy seeks to tax payments made to these companies for ads.
Why only online companies?
While online companies do not in themselves raise BEPS issues, the OECD observed that it exacerbates them. For instance it is difficult to ensure for online companies that their profits are taxed where economic activities occur as their services cut across indirect and direct taxation.
Will it make services costlier?
The levy could make online portals increase their ad rates, meaning companies will have to pay more for the advertising on them. If they choose to pass this cost to the customers it may get reflected increased cost of services.
Is India the only country to impose such taxes?
No. UK was the first to investigate into Google revenues since 2005, though not under the BEPS project. Facebook has said it will restructure its UK operations in order to pay more tax. According toB BC, Facebook paid just £4,327 in taxes in 2014. This year France imposed a $1.8 billion (`12,000 crore) tax demand on Google. Ikea is under investigation by the EU for channelling $1.1 billion (`7,400 crore) profits through Netherlands. Apple and McDonald’s are also under the scanner of the EU tax panel.
Is the equalisation levy the only measure under BEPS?
No, it is only one of the many components. As Joe Harpaz of Thomson Reuters observed “chief among these (BEPS requirements) is a countryby-country reporting requirement, which requires companies to declare the amount of revenue, profit and tax paid in each country in which they do business.”
Under the BEPS project this information will be available to all participating jurisdictions under automatic exchange. India signed an agreement on automatic exchange of information with China, Canada, Israel and New Zealand.