Will equalisation levy create a level playing field?

The equalisation levy, popularly known as the ‘Google Tax,’ will likely hit more foreign companies and not just the top players. During the Union Budget 2021 on Monday, the government announced certain amendments and clarifications to the Finance Bill 2021, expanding the ambit of foreign internet companies liable to pay the 2% tax on their transaction value. 

The Finance Bill 2021 provides an explanation of what would now constitute online sale of goods and online provision of services. “While previously there was no definition of what would constitute online sale of goods and online provision of services, the explanation would result in covering all e-commerce transactions in their broadest sense which would include any case where purchase order has been placed online or even where payment is accepted online,” Ritesh Kumar, partner, IndusLaw told TechCircle.

The Confederation of All India Traders has welcomed the  equalisation levy, calling it a right step towards creation of a level playing field and a prevention of circumvention of tax laws on digital transactions.

“Not only Amazon and Flipkart but even Google, Microsoft, Zoom and other such foreign companies who are engaged in sale of goods or providing services through any online mode will come under purview of this provision and they will have to pay 2% extra tax from 1st April, 2020,” CAIT said in a statement.

According to the traders’ body, the levy reflects the government’s intent to prevent global etailers from monopolising the Indian market. 

Kumar, however, believes that the tax is going to be “controversial”, especially for the new-age economy. “If something like this remains uncredible from a business point of view, there is a high risk that people will start rethinking on how to set up digital supply chain models,” he said.

“There is no level playing field created through the equalisation levy as these companies were anyway paying GST over the goods sold here. Another 2% is going to be an additional tax, which will be charged on the total transaction value,” he said.

Moreover, the equalization levy remains a unilateral measure. In such scenarios, the governments of two countries doing business mutually decide on how to tax these businesses, according to Kumar.

“Now, they will debate over treaty overrides, whether this kind of equalisation levy is creditable or not. Those issues will anyway come up,” he said.

Due to ambiguity around the bill earlier, only a few internet services companies including Google, Netflix, Adobe were considered to be affected by the tax. 

“Given the hookey Amazon, Walmart etc. have played with the laws of the country, including FEMA and FDI, we expect strict compliance of the proposed provision and zero buckling down should lobby organisations like USIBC create a brouhaha,” the body said.  

TechCirle’s emails to Amazon and Flipkart on the issue went unanswered at the time of publishing this story. 

“Uber complies with regulations wherever it operates. We are working closely with the Indian authorities on tax-related announcements and are fully compliant,” the cab aggregator told TechCircle.  

What is the equalisation levy?

Equalisation levy was first introduced in Finance Bill 2016, wherein the tax levied was at the rate of 6% on amount of consideration for specified services received by a non-resident from a person resident in India if such consideration exceeds Rs 100,000 during a financial service, according a note from IndusLaw. 

This scope was then widened through Finance Act 2020 to impose equalisation levy at the rate of 2% on the amount transacted by an e-commerce operator from online sale of goods or online provisions of services. 

According to the the proposed amendment announced on Monday, online sale of goods and online provision of service shall include one or more of the following activities: acceptance of offer for sale; or  Placing of purchase order; or Acceptance of the purchase order; or  Payment of consideration; or Supply of goods or provisions of services partly or wholly

“In simple terms, in today’s day and age where startups are innovating, something like this will only create more issues for them to deal with.” Kumar said.