A group of seven top industry associations representing internet and technology giants such as Google, Facebook, Amazon, Microsoft and Adobe has sought withdrawal of the new equalisation levy that comes into force from April 1, due to its widespread negative impact on American companies.
The associations have written a joint letter to United States Trade Representative Robert E Lighthizer seeking “swift engagement with the Government of India” to raise “strong concerns” on the new levy, which they said was a “highly discriminatory new tax on foreign companies.”
Last week, the government expanded the scope of the equalisation levy – which was first imposed in 2016 – to all overseas e-commerce transactions originating from India. This was done through an amendment to the Finance Bill, passed by Parliament on March 23.
Apart from firms such as Netflix, Airbnb and Bookings.com, technology, internet and Software as a Service (SaaS) companies ranging from Microsoft to Adobe and Google to Facebook, which offer services to Indians through their overseas arms, are expected to be impacted by the new 2% levy.
“The tax was incorporated into the Union Budget 2020 at a late stage and without any public consultation or Parliamentary debate and yet is set to apply only one week later, starting on April 1,” according to the letter dated March 27 which ET has reviewed.
The letter has been jointly written by Computing Technology Industry Association (CompTIA), Information Technology Industry Council (ITI), Internet Association (IA), US-India Strategic Partnership Forum (USISPF), United States Council for International Business (USCIB) and two other industry bodies.
Separately, the Internet and Mobile Association of India (IAMAI) has asked the government to withdraw the levy saying it requires companies to change its internal systems and billing mechanisms and would burden the industry at a time when it is struggling due to the Covid-19 pandemic.
“This sudden imposing of an additional levy at such times will only make matters worse,” IAMAI said in a statement on Tuesday.
The top concern voiced in the letter by the seven US-based associations is that the levy directly discriminates against US firms and exports while explicitly exempting Indian firms.
It also says that the scope of the levy is also significantly broader than that of the national European digital services taxes (DST). The levy is applicable to all companies with a turnover of Rs 2 crore, which is a very low exemption threshold, the letter states.
As equalisation levy is not a part of income tax, companies may not get credit for it in their residence country or favourable treaty benefits.
This will push some companies to set up local operations in India for compliance and may pass on the higher cost of operations to customers, say experts.
The tax, which came as a bit of “surprise”, has been imposed at a time when the Organisation for Economic Co-operation and Development (OECD) is still developing a consensus on taxation of digitalized businesses.
India has been negotiating terms that may be favourable for the country, including that the number of users should determine taxes payable by digital majors in a country.
“The Indian tax represents the broadest framing of a unilateral tax on e-commerce firms that we have seen to date, and runs directly counter to the Indian Government’s commitment to reaching a multilateral solution in ongoing negotiations at the OECD on the taxation challenges of digitalization to the global economy,” the letter says.
The letter has sought immediate intervention of the USTR despite the ongoing health crisis.
“Given the uniquely problematic features of the tax, the immediate and widespread negative impacts on U.S. companies, the Indian Government’s failure to consult with industry, and its imminent entry into force, we would greatly appreciate your near-term engagement to seek its withdrawal,” it said.
Neeru Ahuja, Partner, Deloitte India said that the levy may face multiple implementation challenges. “There also could be legal challenge from the perspective of extra-territoriality as the provision also covers non-resident to non-resident transaction which uses India data,” Ahuja said, adding questions over how a non-resident gets credit for these taxes in the home country also would arise.
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