Currently, many of them pay a 10% royalty withholding tax on purchases from multinationals located outside India.
India has brought in new regulation effective April 1 whereby the 2% tax could be levied on any purchase by an Indian or India-based entity through an overseas ecommerce platform.
Tax experts say lack of clarity around the levy means different companies were interpreting it in a different way. Some companies are being cautious and paying 12% on these transactions — royalty withholding tax plus the equalisation levy. Others are opting for either 10% or 2% tax.
“Technically, foreign companies that receive consideration for software or other products that qualify as a royalty could face double taxation since both royalty withholding tax at 10% and equalisation levy at 2% would be applicable on the same transaction. However, there could also be an opportunity for tax arbitrage from April 2021 as some companies may choose to pay the 2% levy rather than the 10% tax unless the law is amended,” Deloitte India partner Rajesh H Gandhi said.
Several multinationals could also look to explore this as a loophole for tax arbitrage.
There could also be challenges around tax credits where the classification of a transaction as being liable to 10% or 2% tax is disputed by the tax authorities.
This would mean that a multinational paying tax in India may not be able to set it off against taxes paid in their home country — which normally is allowed.
The focus of the investigation is the new equalisation levy of 2%.
The Indian government has submitted its responses to the investigating authorities and the fear is that there could be a reciprocal tax on Indian companies operating out of the US.
The government has expanded the scope of the equalisation levy from April 1. The levy was first introduced in 2016, in a bid to tax the digital advertising revenue of Internet giants such as Google, Facebook and Amazon from India. As per the current wording, the 2% equalisation levy could be imposed on any purchase through an overseas platform.
Many firms fear that now all kinds of transactions including hotel bookings, software purchase and even buying certain components from overseas could come under the gamut of equalisation due to the way the law is worded, tax experts said.