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BENGALURU/NEW DELHI : India’s collections from the equalization levy, or the so-called Google tax, surged almost 90% in the year ended March to almost 4,000 crore, led by improved compliance, economic revival, and the increased scope of the tax.

However, the impressive growth may be short-lived, with a compromise pact that India signed with the US taking effect on 1 April.

Digital levy
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Digital levy

India will phase out the 2% digital tax on non-resident entities, including Netflix, Facebook, Adobe, Google, and Microsoft as part of the agreement. This will protect India against retaliatory tariffs of up to 25% by the US on a slew of Indian products.

The digital levy saw collections touch 3,900 crore in 2021-22 after the last instalment deadline of 7 April, against 2,057 crore collected a year earlier, data accessed by Mint showed.

India’s information technology hub Bengaluru accounted for 1,898 crore, or half of the overall equalization levy mop-up. Hyderabad, which also houses large IT players, accounted for a quarter of collections at 953 crore. It was followed by Delhi and Mumbai with collections of 706 crore and 233 crore, respectively.

Overall direct taxes, which comprise income tax paid by individuals and corporate tax, STT and equalization levy, came in at 14.1 trillion in 2021-22, 49% higher than the previous year and 3.02 trillion above the budget estimate. The equalization levy was introduced at 6% in 2016 for digital advertising services, which led to a 200 crore collection that year.

The scope was widened in April 2020 to impose a 2% tax on non-resident e-commerce companies and further expanded in the budget 2021-22 through clarifications. It said that the equalization levy would cover e-commerce supply or service when any activity takes place online, including acceptance of the offer for sale, placing the purchase order, acceptance of the purchase order, supply of goods or provision of services, partly or wholly payment of consideration, etc.

Queries emailed to CBDT on Tuesday remained unanswered till press time.

The pact with the US means that from the current fiscal, New Delhi will not be able to keep the entire collections under the equalization levy, but only as much as is agreed under an OECD global tax deal signed in October. Under the arrangement, companies will be able to accrue the benefits in the form of credits for the tax paid in excess of that allowed under the OECD tax pact signed by 136 countries last year.

Experts said this may not translate into much revenue for India, considering the limited scope of the global tax. The Global Digital Tax deal would only cover tech giants with 20-billion-euro revenues (top 100 companies) and a profit margin greater than 10%, whereas the 2% equalization levy is applicable on non-resident e-commerce players with a revenue of 2 crore.

The rules of computation on the global tax deal are still awaited. Hence, the central board of direct taxes (CBDT) will work out the formula to calculate the tax due to India only after that.

“While the broad contours of the proposed digital economy tax regime were made public last year, the fine print of the rules and how the proposed multilateral convention (MLC) is negotiated and ratified by individual nations are to be seen. Equalization levy and other unilateral digital tax measures will be withdrawn by countries once the new MLC comes into force," said Suranjali Tandon, an expert on taxation and sustainable finance and an assistant professor at the National Institute of Public Finance and Policy. According to a study by Tandon, tentative gains that will accrue to India are “modest" and may even lead to losses for India from the current revenues.

E-commerce companies that fall under the scope of the equalization levy include Alibaba, Adobe, Uber, Udemy, Zoom, Expedia, Ikea, LinkedIn, Spotify, and eBay. The OECD’s two-pillar multilateral solution 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%. The 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.

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