International Tax Reform: ‘India may not be on the losing side’

Shishir Sinha New Delhi | Updated on September 26, 2021

Revenue Secretary expects a large number of firms to end up paying taxes in India

Ahead of the finalisation of the consensus agreement for international tax reform involving 130 countries coming to end next month, officials at the Finance Ministry do not foresee India on the losing side.

Also, doing away with Equalisation Levy (EL) on digital services with the introduction of the new reform, will depend on the outcome of the negotiation, according to a Finance Ministry official.

On July 1, the Organisation for Economic Co-operation and Development (OECD) announced that 130 countries and jurisdictions, including India, have joined a new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate.

The timeline for the conclusion of the negotiations includes an October 2021 deadline for the remaining technical work on the two-pillar approach, as well as a plan for the effective implementation in 2023.

Talking to BusinessLine, Tarun Bajaj, Revenue Secretary, said that detailed discussions are yet to take place, based on which the exact contours of that agreement will be built up. “However, we are part of the negotiation, and it has been agreed to that larger firms that operate in all the countries and don’t pay taxes in those countries will also now pay taxes in our country,” he said.

Paying taxes in India

He expects a large number of such firms to end up paying taxes in India.

“We have done reasonable guestimate and I don’t think India will be the loser there, but it will depend on what exact contours are fixed in detailed negotiation to what is the percentage of share of taxes that will happen,” he said.

The proposed solution consists of two components: Pillar One, which is about reallocation of additional share of profit to the market jurisdictions; and Pillar Two consisting of minimum tax and subject to tax rules.

According to the OECD, under Pillar One, taxing rights on more than $100 billion of profit are expected to be reallocated to market jurisdictions each year. The global minimum corporate income tax under Pillar Two – with a minimum rate of at least 15 per cent – is estimated to generate around $150 billion in additional global tax revenues annually. Additional benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations, said the OECD.

“An important thing is the concept of minimum tax. So, places where people would rush to because there were no taxes or very small taxes, that would lose so much of significance and that also should help our country,” said Bajaj.

On whether India might have to withdraw the EL once the proposed taxation system is in place, Bajaj said that exact contours finalised post detailed discussion will determine this issue.

Google Tax

Introduced in 2016, also known as ‘Google Tax’, EL was initially applicable to payments for digital advertisement services received by non-resident companies without a permanent establishment here, if these exceeded ₹1 lakh a year. The rate of tax was 6 per cent.

The companies using these services are required to withhold the tax amount. In the 2020-21 Budget, the government widened the ambit of the levy by including e-commerce companies.

The applicable tax rate is two per cent (plus a surcharge) on amount of consideration received/receivable by an e-commerce operator. This came into effect from April 1 this year.

Published on September 26, 2021

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