All goods imported by subsidiaries of multinational companies could attract the equalisation levy.

The government said recently that only companies that have a permanent establishment (PE) in India would be outside the purview of the equalisation levy — a 2% tax applicable on gross revenue.

This means laptops to automobiles and heavy industrial equipment to packaged goods will all attract the levy following the recent amendment to the finance bill. PE is a concept in taxation and determines which country has the right to tax a company’s profits.

Tax experts say any foreign firm that imports a good after raising a purchase order though its internal company platform will be covered under the levy. Subsidiaries usually raise purchase orders on internal ERP systems or other platforms before they import goods.

The government has expanded the scope of the equalisation levy – which was intended to tax the digital advertising revenues of internet giants from India – to include any purchase by an Indian or India-based entity through an overseas ecommerce platform. Equalisation levy of 6% was first imposed on cross-border digital transactions in 2016.

Legal experts say the law has been worded in such a way that even ERP (enterprise resource planning) systems — the internal software several companies use — could technically be considered an online platform and attract the levy. In the absence of a precise definition of ‘platform’, any transaction that takes place online will be subjected to tax.

Most foreign companies had hoped that the government would clarify this point in the amendment and withheld from paying the tax.

The government proposed to broaden the scope of the equalisation levy in the budget and the new regulations now define online sale of goods or services as any purchase that has been made online, online payment or even an offer that is accepted online. “Since a gross basis levy and the margins in such businesses are typically thin, hence, such gross basis levy and that too non-creditable in the home country may make large number of such old business models unviable,” said Rahul Garg, Partner, Asire Consulting.

Dilemma

This potentially covers every transaction if the Indian entity does not have a permanent establishment, experts say. In several cases, companies in the infrastructure sector create special purpose vehicles merely to implement a particular project. Now, those too would have to bear the 2% cost.

Thousands of inter-group transactions involving multinationals and their overseas subsidiaries or parents will potentially attract the additional 2% tax if these have taken place online — either through emails or any internal systems.

Several industry experts and economists also point out how the Covid-19 pandemic is set to create a situation where large economies including India, the United States, the United Kingdom, China and the European Union would compete for tax revenues.

Market watchers fear that countries could start a tug of war for taxing these digital giants on the same or similar revenues in the absence of any definitive global tax framework. “It would be important if government comes up with some clarity, particularly on the sale and purchase of goods through such customised ERP systems or platforms, or else this would trigger a big challenge for the MNCs as it would unsettle the long-established principles of non-taxation in India,” Garg said.

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