India Digital Equalization Levy amplified

During the last week of March, and to complete the current 6% Equalization Levy, India passed the 2020-21 budget amendments containing a 2% tax on all foreign billings to local companies for digital services.

Foreign billings being defined as the cases when companies receive the services payment abroad for a service provided to customers in India.

The tax will also apply to e-commerce transactions and revenue earned from digital advertising targeted to Indian residents.

The “e-commerce supply or services” are defined as:

  • Online sale of goods owned or intermediated by the e-commerce operator through a platform
  • Online provision of services provided by the e-commerce operator
  • Any combination of the previous

The levy is applicable when the goods/services are provided by the e-commerce operator to:

  • A person resident in India
  • A non-resident for adds sold abroad but targeted at persons resident in India or using an IP address there
  • A person who buys goods-services using a local IP address

The additional new levy is not applicable when:

  • The non-resident has a PE in India and the e-commerce supply or services are effectively connected to it
  • The previously in place 6% equalization levy on “specified services” applies to the same transaction
  • The revenue generated through local IP addresses is lower than approximately U.S. $267,000

Sources recently shared that Google is concerned about the additional burdensome to search and identify the countries where the advertising contracts generating the revenue include or finally result in practice to include local Indian users.

Digital and IT industry associations representatives are requesting a minimum 6 months deferral in the effect of this regulation as companies focus in the prevalent Covid-19 crisis management.  

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Some parties are claiming this comes as a surprise, but several warnings were provided by the Government during the last 2 years. 

Considering how the Digital Advertising Industry Value Chain plays nowadays internationally based on targeting and instant retargeting, these movement seeks to capture  the part of that revenue scaping from the former equalization levy while at the same time provide an additional tax collection safety network during the Covi-19 crisis coming from one the very few activities not hardly affected by it.

While many others are practically shutting down digital advertising experienced a relevant ramp-up recently as unprecedented amounts of users are confined but connected in their houses. Tariffs will for sure be renegotiated but still the recurrence of the revenues seems will be there.

There is uncertainty at the same time about how the pandemic situation will affect the already stressed timing of the OECD work on Pillar 1 and 2.   

This extended scope to be added to the previous one prepares the “levy” to capture almost any digital service provided from abroad, and together with the local law on significant digital presence make India one of the most demanding countries from a Tax perspective for foreign pure digital play businesses, unless the revenue derived from the local users participation is effectively and completely channeled through the local subsidiary or PE.

Services from cloud providers or music and video streaming digital services are not specifically listed to fall in scope but from the law definitions we could conclude so, as it defines an “e-commerce operator” as a non-resident “owning, operating or managing a digital or electronic facility or platform for online sale of goods or the online provision of services”.  Nothing is mentioned to exempt regulated financial products intermediated / sold through digital platforms from the tax.

It would need to be confirmed if the pure licensing of software or the leasing/renting of equipment/products through a foreign digital platform to local users is subject to the equalization levy, or to regular treaty provisions.

From a technical regulation outlook, this 2% additional levy would also not be part of the Income-tax regulations and therefore not affected in principle by the provisions of India’s income tax treaties.

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