Retro changes to Google Tax will hurt foreign investment: Industry

Key global industry associations have flagged tax uncertainty concerns regarding the expansion in scope of a 2 per cent digital tax in the Union Budget 2021-22, arguing that the ‘retroactive’ amendment would undermine the confidence in India’s regulatory environment and negatively impact the ease of doing business in the country.
 
In a letter addressed to Jayant Sinha, chairman of the parliamentary standing committee of finance, and marked to Finance Minister Nirmala Sitharaman, the multi-association said that the expansion of the equalisation levy would ‘undermine the principle of tax certainty’ and impact foreign investment in the country. It was written days before the passage of the Finance Bill 2021-22 on Tuesday.

 
“The finance Bill prescribes a retroactive effective date of April 1, 2020, which further undermines the principle of tax certainty and exacerbates the already significant compliance burdens posed by an unusual extraterritorial tax on revenue. This continued and growing uncertainty impacts foreign companies’ ability and willingness to invest in India,” said the letter.
 

The multi-association includes representation from the US-India Business Council, US-India Strategic Partnership Forum, Japan Machinery Center for Trade and Investment, techUK, US Chamber of Commerce, Allied for Startups, Asia Internet Coalition, Asia Pacific MSME Trade Coalition, Information Technology Industry Council, Internet and Mobile Association of India, and Japan Electronics and Information Technology Industries Association.

 
Despite a flurry of industry representations, the government only provided limited relief from the equalisation levy in the Finance Act, exempting cases where goods or services owned and operated by Indians are transacted over an overseas e-commerce platform to address double taxation concerns raised by the industry.
 
The multi-association also raised concerns over India not releasing frequently asked questions or implementation guidance in response to company enquiries to better facilitate compliance with the equalisation levy last year.
 
While the levy applied only to digital advertising services till March 2020 at the rate of 6 per cent, the government widened the scope to impose 2 per cent tax on non-resident e-commerce players with a turnover of Rs 2 crore from April 1, 2020.

 
In the Budget through a clarification, the government expanded the scope of the levy to e-commerce supply or service when any activity, 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, takes place online.
 
“This expansion will capture brick-and-mortar businesses, as well as other companies that traditionally operate offline, and subject them to the equalisation levy simply because their transactions involve online payments or are concluded via email,” said the letter.
 
It further said this could have unintended consequences where even transactions within an organisation, and Indian imports of oil and food products, are subject to the equalisation levy, “ultimately making India a less desirable environment for investment”.

 
It also flagged concerns pertaining to the levy on gross consideration within scope and not just the commission earned.
 
“The levy would apply to the entire amount of consideration received for the sale of goods or provision of services, even when the underlying goods or service is provided by an unrelated third party and the e-commerce operator’s income is only a portion of the gross amount received,” stated the letter.
 
The letter further said the amendment would create significant challenges for all businesses operating in India, further exacerbating the detrimental impact of a measure at odds with India’s ongoing commitment to the multilateral negotiations at the Organisation for Economic Co-operation and Development/Group of Twenty Inclusive Framework to address the tax challenges arising from the digitalisation of the global economy,” said the letter.