India Not to Levy Digital Tax on Offshore E-Commerce Firms with Indian Arm
Offshore e-commerce firms that have a permanent establishment in India or pay income tax in India are exempt from the two percent equalization levy. India’s digital tax or equalization levy was introduced in April 2020 for foreign e-commerce sellers of goods and services to level the playing field with local businesses paying taxes in India. Foreign e-commerce companies will need to segregate inventory of resident and non-resident sellers on their platforms to make clear where the levy will be applicable.
On March 23, the Indian parliament confirmed changes to the 2021 Finance Bill, including clarity on the digital equalization levy.
India introduced the digital tax in April 2020 for foreign companies selling goods and services online to customers in India and showing annual revenues more than INR 20 million (approx. US$275,404).
When will the tax not apply?
The government has clarified that offshore e-commerce firms that sell through an Indian arm will not have to pay the two percent equalisation levy.
This means that foreign e-commerce platforms with an Indian permanent establishment or paying income tax in India will not be subject to the digital tax.
More specifically, if the goods and services sold on a foreign e-commerce platform are owned or provided by an Indian resident or Indian permanent establishment, they will not be subject to the two percent equalization levy.
To ensure this assessment is clear, tax authorities will require that foreign e-commerce providers of goods and services in India clearly stipulate whether the inventory is sold by resident or foreign sellers on their platforms.
As per industry watchers and tax experts, foreign companies following the online marketplace model will need to segregate the sale prices of the items on their sites.
India’s digital tax: Government position is not unique
Over the last five years, India has been aggressively pushing for increase in digital transactions and the government has no intention to obstruct digital commerce. The finance minister, Nirmala Sitharaman, explained that the equalisation levy was imposed “to give level playing field between Indian businesses who pay tax in India and foreign e-commerce companies who do business in India but do not pay any income tax here.”
India is not alone in its imposition of such a levy on digital sellers, which has been deemed as discriminatory by the US as it applies to US firms.
For example, France imposes a three percent digital services tax on revenues generated in the country by digital companies, wherever they are established, and if they make annual supplies of taxable services of more than €25 million (approx. US$29.54 million) in France and €750 million (approx. US$886.33 million) worldwide.
In the ASEAN region, Singapore, Indonesia, and Malaysia impose a digital service tax with Thailand announcing forthcoming plans to tax its foreign digital service providers.
Meanwhile, negotiations are underway at the Organisation for Economic Cooperation and Development (OECD) involving 140 countries to overhaul international tax rules given the fast growth of internet economies. The OECD’s decision on cross-border tax rules will provide clarity on the tax liability of companies providing digital services or selling online. This is expected by mid-2021.
The countries that currently impose the digital tax point to how internet giants or large e-commerce platforms are able to ‘book profits in low-tax countries’ regardless of where their customers are located – which necessitated changes in the existing framework of international taxation.
India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to firstname.lastname@example.org for more support on doing business in in India.
We also maintain offices or have alliance partners assisting foreign investors in Indonesia, Singapore, Vietnam, Philippines, Malaysia, Thailand, Italy, Germany, and the United States, in addition to practices in Bangladesh and Russia.