Context

• The United States has proposed retaliatory trade actions against India and certain other countries that have imposed or are considering digital services tax on e-commerce companies.
• The United States Trade Representative (USTR) has proposed to impose retaliatory tariffs up to 25 per cent on a wide variety of Indian products ranging from shrimps and basmati rice to gold and silver items, on grounds that India’s digital services tax, also known as equalisation levy or Google tax, is unreasonable or discriminatory and burdens or restricts US trade.

Base Erosion & Profit Shifting

• Following the financial crisis in 2008 the G20 countries put tax at the top of their agenda and have led the fight against tax evasion and avoidance.
• Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.
• BEPS practices cost countries USD 100-240 billion in lost revenue annually.
• The OECD/G20 Inclusive Framework on BEPS has a global membership, including about 70% of non-OECD and non-G20 countries from all geographic regions collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensures a more transparent tax environment.
• As of now, there are over 135 members and 14 observer organisations.
• India enjoys the status of Observer at OECD.

Equalisation Levy

• Equalisation Levy was introduced in India in 2016, with the intention of taxing the digital transactions i.e. the income accruing to foreign e-commerce companies from India. It is aimed at taxing business to business transactions.
• Equalisation Levy is one of the recommendations of the BEPS (Base Erosion and Profit Shifting) Action Plan.

Applicability

The two conditions to be met to be liable to equalisation levy:

• The payment should be made to a non-resident service provider;
• The annual payment made to one service provider exceeds Rs. 1,00,000 in one financial year.

Services Covered

• Currently, not all services are covered under the ambit of equalisation Levy. The following services covered:

1. Online advertisement;
2. Any provision for digital advertising space or facilities/ service for the purpose of online advertisement.

Rate of Tax Under Equalisation Levy

• Currently the applicable rate of tax is 6% of the gross consideration to be paid. 

Double Tax Avoidance Agreement (DTAA)

• The Double Tax Avoidance Agreement is a treaty signed by two countries to help taxpayers avoid paying double taxes on the same income.
• A DTAA becomes applicable in cases where an individual is a resident of one nation, but earns income in another.
• The agreement is signed to make a country an attractive destination as well as to enable NRIs to get relief from having to pay taxes multiple times.
• DTAA does not mean that the NRI can completely avoid taxes, but it does mean that the NRI can avoid paying higher taxes in both countries.
• DTAA, signed by India with different countries, fixes a specific rate at which tax has to be deducted on income paid to residents of that country.

Under the Double Tax Avoidance Agreement, NRIs don’t have to pay tax twice on the following income earned from:

• Services provided in India.
• Salary received in India.
• House property located in India.
• Capital gains on transfer of assets in India.
• Fixed deposits in India.
• Savings bank account in India.

References:

1. https://www.youtube.com/watch?v=QjtuvGEaEFo&list=PLVOgwA_DiGzoqQsGjmamTu6f453RWpm_I&index=4
2. https://www.oecd.org/tax/beps/about/
3. https://incometaxindia.gov.in/pages/acts/equalisation-levy.aspx
4. https://cleartax.in/s/equalisation-levy
5. https://cleartax.in/s/how-nris-can-claim-benefits-under-dtaa