In a major setback, India will have to give up on its much-contentious equalisation levy or the so-called ‘Google Tax’ as part of the global tax deal agreed by 136 countries late on Friday.
It is part of the two-pillar multilateral solution, which gives rights to countries, including India, to tax digital players including Microsoft, Google, Facebook, and Netflix, besides setting a 'global minimum corporation tax' of 15 per cent.
Conceding ground, India also settled for a re-allocation of only 25 per cent of non-routine profits of these entities above a 10-per cent margin, as against its stand for at least 30 per cent re-allocation, leaving little for New Delhi to gain.
The OECD base erosion and profit shifting (BEPS) deal is intended to ensure that large multinational digital entities pay more taxes in countries where they have customers or users regardless of where they operate from. However, the deal may not mean much in terms of revenues for India, as it will have to give up on the 2 per cent equalisation levy, which was increasingly becoming a revenue source. The collection from equalisation levy nearly trebled to Rs 1,618 crore in the first half of the current fiscal.
"The Multilateral Convention (MLC) will require all parties to remove all Digital Services Taxes and other relevant similar measures with respect to all companies, and to commit not to introduce such measures in the future," the OECD statement said.
Besides, no newly enacted Digital Services Taxes or other relevant similar measures will be imposed on any company from October 8, 2021, and until the earlier of December 31, 2023, or the coming into force of the MLC, the statement added.
The MLC to be implemented will be developed and opened for signature in 2022 and will come into effect from 2023. The Global Digital Tax deal would only cover companies with 20-billion-euro revenues and a profit margin above 10 per cent. These largely cover the top 100 companies. Before July, India and other developing nations had proposed a threshold of Euro 1 billion to cover 5,000 global companies.
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India's equalisation levy has a much lower annual revenue threshold of Rs 2 crore (Euro 0.2 million) as against Euro 20 billion under Pillar 1 of the proposed OECD tax deal. The second pillar relates to minimum tax and is subject to tax rules at 15 per cent.
"The concerns of India as also of the developing world would essentially be whether and to what extent the complexity and the resources required to implement the agreed solution are proportionate or disproportionate to the expected equalisation net revenue gain," said Akhilesh Ranjan, former member, Central Board of Direct Taxes (CBDT).
The OECD has estimated that developing countries are expected to gain an additional 1 per cent of corporate income tax (CIT) revenues, on average.
Meanwhile, India is hoping to make some gains from Pillar 2 of the package -- a global minimum tax of 15 per cent. It is aimed to eliminate the concept of race to the bottom in terms of tax competition. Ireland, which till recently was opposed to the proposal, also agreed to come on board last evening. Ireland has a corporate tax rate of just 12.5 per cent.
On account of Pillar Two, the OECD has estimated that developing country revenue would go up by around 1.5-2 per cent of CIT revenues on average.
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