India awaits finality on taxing global MNCs before removing 'Google Tax'

OECD agreement to be deliberated by finance ministers of G20 nations on Wednesday

India will await the final outcome of the global tax deal before taking call on withdrawing the equalisation levy (EL) on digital companies such as Google, Facebook and Netflix, which have no physical presence in India, said two official privy to the development.

The OECD agreement, backed by 136 nations last week, will now be deliberated by the finance ministers of G20 nations on Wednesday. It suggests multinational companies will be subject to a minimum tax of 15 per cent from 2023.

The discussion would be crucial as it will decide the modalities of the deal, which will further go to the G20 Leaders summit, attended by the head of the governments by the month end.

“We have given our agreement to the proposed solution at the global forum. But keeping in mind the complexities, the final call on removal of google tax would be taken, once the tax deal comes into force, said one of the two officials.

Sources say that roll back of EL would be done by amending the laws in the Income-tax Act.

EL contribution to the exchequer kitty has increased significantly in the past few years since its implementation in 2016, even though it only applies a six per cent tax on payment received by a non-resident service provider from an Indian resident in respect to digital advertising etc. In the first half of the current financial year, the government had collected over Rs 1,600 crore, which is double the collection last year.

On Friday, OECD tied up several loose ends by finalising two-pillar solutions and laying a roadmap. It said there is an expected increase in additional tax revenues to the extent around $ 150 billion annually arising out of this deal.

This proposal works on two pillars, of which pillar-1 deals with fairer profit allocation to the market jurisdictions regardless of the physical presence of the entities there for which a multilateral convention can be implemented from 2023, whereas pillar-2 has introduced a global minimum tax of 15 per cent.

Countries are aiming to sign a multilateral convention during 2022, with effective implementation in 2023, it said. The convention will be a vehicle for implementation of the newly agreed taxing right under Pillar One, as well as for the removal provisions with respect to unilateral measures like Digital Service Taxes.

“No newly enacted Digital Services Taxes or other relevant similar measures would be imposed on any company from October 8, 2021 and until the earlier of December 31, 2023 or the coming into force of the Multilateral Convention. The modality for the removal of existing Digital Services Taxes and other relevant similar measures needs to be appropriately coordinated, OECD stated on Friday.

According to the OECD, the  global tax deal would cover companies with 20-billion-euro revenues and a profit margin above 10 per cent. These largely cover the top 100 companies.

Earlier, India and other developing nations had proposed a threshold of Euro 1 billion to cover 5,000 global companies.  On the other hand EL has an annual revenue threshold of just 0.2 million.  

Calling it a path-breaking deal, experts are of the opinion that it won't just ensure a fairer International tax system, but may also put an end to tariff war between countries. For instance, in June, the United States had decided to impose additional tariffs on a slew of Indian imports. However, it had said that the so-called tariff will remain suspended for six month, (i.e till December) as Washington hopes for a multilateral solution on the issue.

Gouri Puri, partner, Shardul Amarchand Mangaldas & Co said, "It’s an important win for tax diplomacy and a seminal moment in international tax history. A consensus on pillar 1 and pillar 2 are key to secure a more certain and stable tax regime for multinationals and governments. While the fine print is awaited, India is balancing its interests both as an importer and an exporter of capital, goods and services. The deal will prevent a race to the bottom amongst countries."

Taxing Digital companies

• OECD seeks removal of unilateral measures like  Google tax by countries including India

• Say no new tax or other relevant similar measures would be imposed on any company from October 8, and until the earlier of December 31, 2023

• Global tax deal would cover companies with 20-billion-euro revenues and a profit margin above 10 per cent.

• Outcomes of Wednesday meeting with finance ministers will go to  G20 summit in the month end

• The fine print is expected after these meetings with  countries over the proposed framework