There is a principle on which the international corporate tax framework is based. That is a multinational group should be taxed in the countries where it creates value. There have been treaties and local regulations that saw a great number of changes recently.
These are changes that happened by the guidance provided by BEPS (Base Erosion and Profit Shifting) initiative of the organization for economic corporation and development (OECD) which has the support of countries globally, obviously including India. Even in the traditional brick-and-mortar business models, it has been found by tax authorities that taxing MNCs (Multi-National Companies) is an exercise stridently troubled with litigation.
In the traditional sense, digital business models have speeded up the issues to a different level with a few corporations which have bases in a handful of countries. The result is to generate massive revenues without creating a tax presence in the source country. Discontent has been building up among nations because of the prevailing tax rules which do not seem to properly address the gap between the revenues generated by digital corporations and the taxes paid by them in individual source nations. No consensus has emerged between the countries on the mechanism for taxing profits of digital corporations so far. The levy of digital services tax (DST) emerged as a temporary measure in the absence of a consensus. And it was adopted by countries like France, Spain, the UK, Australia, and India.
India introduced equalization levy (EL) in 2016. Anyhow the levy was limited online advertisement and associated revenues. The Finance Act 2020 widened the scope of EL to include e-commerce supply or services by an e-commerce operator. It is curious to note that this was done not by going in for any stakeholder feedback. Various digital transactions and services under the tax net were brought by introducing a 2% levy on revenues of such entities. In the case of smaller companies whose gross receipts/sales less than Rs.20 million, certain exceptions have been given shape to.
An income tax exemption for such income has been introduced parallelly but a mismatch in effective dates of EL and such income exemption became apparent. On this front, a correction is very likely. It is to be noted that a host of digital companies including Facebook and Amazon are US-headquartered. The US is pressurizing for making DST optional. Recently when France introduced DST, the US retaliated. India too appears adamant in its decision to introduce EL often referred to as Google Tax. India could meet similar revengeful measures if it goes ahead with its plans.
