Genesis and Implementation of the Equalisation Levy
The equalisation levy, introduced in 2016 through the Finance Act, aimed to tax online advertising. This approach avoided treaty conflicts, as it was not part of the Income-tax Act, thwarting tax avoidance claims based on international treaty non-recognition. This levy targeted large digital companies, which historically paid low tax rates globally—an issue highlighted by the European Court of Justice.
International Reaction and Negotiations
- 1. Initially, the levy was seen as a unilateral action in international tax diplomacy, leading to critiques of double taxation and consumer cost increases.
- 1.1. However, it inspired other countries to consider similar measures.
- 2. The international tax community sought an agreement to align taxes with market size, but disagreements persisted:
- 2.1. The US favored taxing residual returns.
- 2.2. India supported a formulary apportionment of profits.
OECD and UN Involvement
The OECD attempted to develop a comprehensive solution, with the US rejoining negotiations in 2021 under the Biden administration. Despite India’s efforts, economic interests took precedence, leading to visible divisions in the dialogue. In 2024, 110 countries supported a UN-led international tax convention, proposing a simpler withholding tax solution to prevent double taxation.
US-India Trade Tensions and Withdrawal of the Levy
- 1. The US launched USTR investigations in 2020, declaring India's expanded levy discriminatory, threatening retaliatory tariffs.
- 2. India withdrew a 2% tax, but with Trump's presidency, tariff threats returned, prompting discussions on the withdrawal of the 6% levy.
Impact and Future Considerations
- 1. Critics argued the levy was discriminatory, with costs passed to consumers, though evidence is lacking.
- 2. Revenues from the levy amounted to Rs 40 billion in 2022.
The withdrawal of the levy raises questions about its timing in the absence of a global tax deal. Yet, it remains a testament to India's ability to implement domestic measures and challenge the global tax consensus.
