India’s equalization levy on digital advertising revenue will be repealed if countries settle on a new international tax framework for the digital economy, according to an Indian revenue official.
Following the final action 1 report of the OECD's base erosion and profit-shifting project, India introduced the equalization levy to address the tax challenges arising from the digital age. Effective from 2016, the levy is a 6 percent tax on business-to-business payments made to nonresidents — entities with no permanent establishment in India — for online advertising. It has been credited with generating between INR 5.6 billion ($79.9 million) and INR 5.9 billion ($84.2 million) in revenue in 2017-2018.
But the equalization levy “will not stand" if the OECD-led efforts yield a global consensus by 2020 on revamping the international tax rules, according to Kamlesh Varshney, joint secretary of tax policy and legislation with India’s Ministry of Finance.
“It is only a temporary measure, like all of the countries have taken,” Varshney said May 9 at the ninth annual Pacific Rim Tax Conference in Redwood City, California. He added that India is committed “to go by global consensus.”
The BEPS inclusive framework, comprising 129 OECD and non-OECD countries committed to implementing the four minimum standards of the BEPS project, is mulling several proposals under two pillars. The OECD plans to present a work plan to G-20 finance ministers and leaders in June.
Proposals under pillar 1, which focuses on profit allocation and nexus issues, include allocating more taxing rights based on active user contribution and marketing intangibles. G-24 developing countries, including India, have put forth a third proposal based on “significant economic presence.”
“If consensus has to be arrived at, each country has to work together and try to understand good points of each proposal and maybe try to merge those good points,” Varshney said. Declining to say whether India would accept a specific alternative proposal over the significant economic presence proposal, he stressed that the country “will contribute to consensus development.”
Varshney further explained that India’s domestic significant economic presence concept is limited by the country’s tax treaties.
India introduced a new digital PE rule in 2018 that, absent an applicable treaty, provides that a significant economic presence in India would constitute a “business connection” to which income that is deemed to arise or accrue in India can be attributed. Details regarding the relevant thresholds for establishing a presence are still unknown.
Tax treaties will override the domestic significant economic presence definition, Varshney said, adding that the framework is “only for those countries with which we don’t have tax treaties, and we have tax treaties with more than 96 countries.”
“Significant economic presence legislation in the Indian Income Tax Act should not be of any concern,” Varshney said. “And as I said earlier, we will follow whatever global consensus on this issue.”