GS-2: Government policies and interventions for development in various sectors.
Keywords: EL1.0, EL 2.0, digital tax, tax haven, e-commerce, tax avoidance, trade hostilities , New Global Tax Regime, global minimum corporate tax
Why in News:
After months of deliberation, India and the US on Wednesday finally agreed on a compromise on the issue of equalisation levy or digital tax levied on the US-based e-commerce companies.
What is Equalization Levy?
Equalization Levy (EL) is a tax leviable on consideration received by a non-resident for specified services. Specified Service means online advertising or provision of digital space for online advertisement or any other service for purpose of online advertising.
Reason for Introduction of Equalisation Levy:
- Many companies who are providing services in cyberspace register themselves in a country wherein the Tax rates are low and pay very low taxes on their global income.
- Like in India The revenue of Google in FY 2014-15 was 4,108 Crores, hence the introduction of the Equalisation levy would fetch the Govt a lot of money which till now was notTaxed that’s why many people are calling Equalisation levy as Google Tax. Because a major share of online ads spent goes to Google.
Equalisation Levy 1.0:
India introduced the Equalisation Levy 1.0 in 2016 with a measures to tax the digital economy. Equalization levy is applicable on: –
- Such specific services are provided by a non-resident not having a Permanent Establishment (PE) in India.
- Payment against such services provided by the non- resident is made by an Indian resident carrying on business or by a non-resident having a PE in India.
- The threshold limit attracting equalization is Rs 1 Lakhs. The
Equalisation Levy will be levied if the aggregate amount of consideration
for such specified services received in a
previous year exceeds Rs. 1 lakh. - Equalization Levy is charged at the rate of 6% on the amount of consideration received/receivable by the non-resident.
Equalisation Levy 2.0:
- In 2020, the Indian Income-tax Act expanded the scope of Equalisation Levy (commonly referred to as ‘Equalisation Levy 2.0 or EL 2.0’) as part of the Finance Act 2020. EL 2.0 was made effective on April 1, 2020.
- The new levy now includes a 2 per cent tax on gross revenues received by a non-resident “e-commerce operator” from the provision of ‘e-commerce supply or service’ to Indian residents or non-resident companies having a permanent establishment in India.
- The expression ‘e-commerce supply or service’, inter alia, includes the
online sale of goods or the online provision of services or facilitation of
the online sale of goods or
provision of services.
• The Equalization levy 2.0 does not apply to transactions already covered by the Equalization Levy 1.0 under Finance Act 2016. Thus, services such as online advertisement, provision of digital space for online advertising, or related services are not subject to EL 2.0.
- EL 2.0 is applicable on the online sale of goods or online provision of services or a combination of both by the non-resident e-commerce operator.
- Further, amendments were made in the Finance Act 2021 to clarify and expand the scope of EL 2.0. One such amendment appears to have expanded the scope of this levy manifold.
- As mentioned above, one of the prerequisites to trigger a charge under EL 2.0 is ‘online sale of goods’ or ‘online provision of service’. There have been doubts about what constitutes an online sale of goods and online provision of services. In Finance Act 2021, these terms have been clarified.
- The threshold limit attracting equalization 2.0 is Rs 2 Crores. The EL 2.0 shall be levied only if the aggregate amount of consideration for such specified services received in a previous year exceeds Rs. 2 crores.
- EL 2 is not applicable where E-commerce operator has a Permanent Establishment in India and the e-commerce supplies or services are effectively connected with such Permanent Establishment.
India and USA agreement on Equalization levy:
- Under the new agreement, Indian government has agreed to refund the excess amount of tax that it collects through equalisation levy starting April 1, 2022 till March 31, 2024, (or when Pillar 1 of the new global tax regime takes effect, whichever is earlier), in comparison to the tax collected under Pillar 1 of the new global tax law in the first full year of its implementation.
- The agreement is likely to end trade hostilities between the two countries after India unilaterally levied a 2% equalisation levy on US based foreign e-commerce companies.
What is Pillar 1 and 2 of New Global Tax Regime?
136 member countries of the Organization of Economic Co-operation and Development (OECD) have agreed to shape up generally accepted international tax rules and principles of global tax arena by a historic drastic global tax reform of the century.
It has two Pillars 1 and 2
- Pillar 1 deals with fairness in the sharing of revenues between and among countries owing to the rapidly increasing digitalization of the world’s businesses where territorial borders, brick-and-mortar presence , on which the current global tax rules are based, are becoming inapplicable.
- Pillar 2 deals with eradication of tax havens and the “race to the bottom” practice of tax cuts/lowered tax rates and offering attractive incentives in attracting businesses and investments, resulting in revenue imbalances and significant losses to governments. To accomplish this, a 15% global minimum corporate tax (effective tax rate) has been agreed upon
Both Pillar 1 and 2 will bring major changes to international tax rules and the New Regime is likely to be put in place by 2023
Source: New Indian Express
:: Prelims Question ::
Q. Consider the following statements about Equalization levy:
1. Equalization levy is applicable on E-commerce operator whether it has a
Permanent Establishment in India or not.
2. The Equalization levy 2.0 shall be levied only if the aggregate amount of
consideration for such specified services received in a previous year exceeds Rs.
1 lakh.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) 1 and 2 only
d) Neither 1 nor 2
Answer: D
