India's 6% equalisation levy on ads may face US scrutiny under Trump memo

The equalisation levy was introduced at 6 per cent in FY17 for digital advertising services

India’s equalisation levy of 6 per cent on online advertisement services provided by non-resident entities may come under scrutiny by the US, with President Donald Trump threatening retaliatory action against countries that impose extraterritorial taxes disproportionately affecting American companies.

 

“The Secretary of the Treasury, in consultation with the US Trade Representative, shall investigate whether any foreign countries are not in compliance with any tax treaty with the US, or have any tax rules in place, or are likely to put tax rules in place, that are extraterritorial or disproportionately affect American companies,” said a presidential memorandum signed by President Trump.

 

Trump has directed the Secretary of the Treasury to deliver the findings within 60 days, along with a list of options for protective measures the US should adopt in response to such “non-compliance or tax rules”.

 

The equalisation levy was introduced at 6 per cent in 2016-17 for digital advertising services. The scope of the tax was widened in 2020 by imposing a 2 per cent levy on the ecommerce supply of goods or services facilitated by overseas ecommerce operators. This 2 per cent levy, known as Google Tax, was phased out from August 1, 2024, as part of a deal reached with the US. However, the 6 per cent equalisation levy on digital advertising services remains intact.

 

Experts suggest that the 6 per cent equalisation levy could be perceived as a barrier to US businesses.

 

“If the US raises concerns about this 6 per cent equalisation levy, even though it had not objected earlier, then India will have to negotiate hard to keep it. Otherwise, the US may retaliate by imposing higher basic Customs duties or doubling the tax rates for Indian citizens and companies under Section 891 of the US Tax Code,” Akhilesh Ranjan, former Central Board of Direct Taxes member and advisor with PwC, said.

 

Separately, the finance ministry is taking a measured approach to implementing the global tax deal, which includes a new global minimum effective tax rate of 15 per cent for certain multinational enterprises (Pillar Two), following the announcement of the US withdrawal from the deal by Trump. The Indian government plans to carefully assess the advantages and disadvantages of moving forward with the deal.

 

“We are not in any rush to conclude Pillar Two. There is no immediate urgency for us to implement it at this stage. We will thoroughly evaluate all aspects, including the implications of the US decision to withdraw, before making any decisions,” a senior government official said.

 

“India has never been in any rush to implement global tax rules because of the involvement of exorbitant costs. After Trump ordered the US withdrawal, India needs to examine its ramifications before taking a final call,” Ranjan added.

 

The Pillar Two rules came into effect on January 1, 2024, and over 35 countries, including the European Union and Britain, have introduced tax rules. Over 100 countries are expected to introduce rules that will come into effect in 2025. Currently, the US enforces a roughly 10 per cent global minimum tax, introduced as part of Trump’s 2017 tax reform. Countries that have implemented the 15 per cent tax could potentially impose a “top-up” tax on US companies paying the lower rate.

 

“The OECD Global Tax Deal supported under the prior administration not only allows extraterritorial jurisdiction over American income but also limits our nation’s ability to enact tax policies that serve the interests of American businesses and workers. This memorandum recaptures our nation’s sovereignty and economic competitiveness by clarifying that the Global Tax Deal has no force or effect in the US,” the memorandum said. 

Wait & Watch

 

*  Equalisation levy was introduced in FY17 for digital ad services

 

*  It could be perceived as a barrier to US businesses, say experts 

 

*  The US may retaliate by imposition higher basic custom duties, they caution

 

*  It may also double tax rates for Indian citizens and companies under section 891 of the US Tax Code