Digital Services Tax Explained: India Withdraws From Equalization Levy After Global Tax Deal Comes Into Force

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  • India agreed to withdraw from the 2% Equalization tax it imposed on foreign companies providing digital services.
  • The United States has also agreed to remove the sanctions it has imposed on India to challenge the tax levy.
  • A new global tax deal has been struck that will ensure multinational companies pay at least 15% tax in the country in which they operate.

While India has
agreed to back down by 2% digital services tax, which was levied on foreign companies for all revenue generated by digital services offered in India, the United States also decided to remove the sanctions it imposed on India to challenge the tax levy.

What is digital taxation?

The central government, in its 2020-2021 finance bill, imposed a 2% digital services tax on the trade and services of foreign e-commerce companies such as Amazon and owned by Walmart Flipkart and others with an annual turnover of ₹ 2 crore or more.

The expanded equalization levy became applicable from April last year to a range of digital services, including non-resident e-commerce operators involved in the online sale of goods and the provision of services.

Since most of these foreign companies are American, American trade The representative considered that this was a discrimination against American companies and that it violated the principles of international tax law. The US government imposed a 25% tariff on goods imported from India in July this year, but it was canceled soon after.

India first imposed a 6% equalization tax in 2016, but this was limited to online advertising services provided by foreign companies.

How will this benefit India?


In October, the G20 summit and the meeting of the Organization for Economic Co-operation and Development saw an international agreement on new global tax rules. This includes that multinational companies must pay at least 15% of their total turnover in each country in which they operate. This would mean that companies like Microsoft, Google, Amazon, etc., must pay taxes for its operation in India.

What does this mean for India?

While the United States has pulled out of the tariff, India has yet to stop the levy as global tax rules have yet to be implemented. However, India and the United States have a deal that will count the equalization levy as a credit against future taxes. These credits will be counted from April 1, 2022 to March 31, 2024 or whenever the global taxes are sorted.

Although the US Treasury Department has welcomed the deal with India, the Indian government has expressed no opinion on it. Even tech giants like Amazon, Google and others are silent on the latest tax rules that will impact them.

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