Initial impact on revenue seen to be adverse
India is “most likely” to adopt the Organisation of Economic Co-operation and Development’s (OECD) Pillar-One and Pillar-Two tax package and bring it into effect from April 2025, a government official told FE on the condition of anonymity.
“Once India implements the two-pillar tax package, it will have to withdraw the equalisation levy (EL), which earned the government a revenue of about Rs 5,000 crore in 2022-23,” the official said. “The revenue to be earned post the adoption the two-pillar tax package in April 2025 could be much lower at the initial stage,” he added.
The shift from EL – referred to as Google tax— to the multilateral solution for taxation rights on profits made by tech giants and others from digital services rendered to Indian consumers from abroad follows the approval of OECD Outcome Statement on the two-pillar solution by 138 countries on July 11 this year. Earlier this month, the OECD came out with a new multilateral convention to check base erosion and profit shifting (BEPS) to ensure that MNCs pay a fair share of taxes in the country of operation.
The convention provides for reallocation of taxing rights of over 25% of the residual profit of the multinational companies to the jurisdictions where their customers are located. “Under Pillar One, taxing rights on about $200 billion in profits are expected to be reallocated to market jurisdictions each year. This is expected to lead to annual global tax revenue gains of between $17-32 billion, based on 2021 data,” the OECD said while releasing the coinvention.
The proposed two-pillar solution consists of two components — Pillar One is about reallocation of additional share of profit to the market jurisdictions and Pillar Two consists of minimum tax.
India and many other developing countries have previously objected to a provision in OECD’s tax package that bars nations from enacting any future digital services taxes such as the equalization levy, saying the clause will unduly restrict sovereign rights to make laws.
Equalisation levy was introduced by India in 2016 to tax the digital economy. Initially, it was levied at 6% of the gross consideration on online advertisements and digital advertising space. Later, its scope was widened in 2020. It is also levied at 2% on the consideration amount paid to non-residents who own, operate or manage an e-commerce facility or platform.
“Equalisation levy is a unilateral amendment to the domestic tax provisions that India undertook while implementing recommendations of BEPS Action Plan 1. It is like the digital service tax which European countries have imposed to tax digital transactions,” said Saurrav Sood, Practice Leader – International Tax and Transfer Pricing at SW India.
“Now, with consensus being drawn on Pillar-Two implementation between countries who are part of the inclusive framework, it is likely that where India implements Pillar-Two rules for seeking allocation in taxing rights, it will have to delete unilateral taxing provisions which were introduced earlier,” Sood said.
Pillar-Two introduces model rules for the global minimum tax that countries may implement into their domestic law which will ensure large multinational corporations are subject to an effective tax rate of 15% on their profits in every jurisdiction where they operate.
Source:indianexpress.com