Tax Treaty Or Equalisation Levy: Google’s Rs 89-Crore Question Before Delhi High Court
A 2% equalisation levy or a 10% withholding tax as per India-Singapore tax treaty—Google Asia Pacific Pte. approached the Delhi High Court with this question in its dispute against the Income Tax Department.
The tax department directed Google Cloud India Pvt. to deduct tax at source at the rate of 10% at the time of making payment to Google Asia Pacific. The department took a view that Google Asia’s income qualifies as fees for technical services. So any payment Google Cloud India makes to Google Asia will attract a withholding tax at the rate of 10% as per the India-Singapore tax treaty.
Contesting this, Google Asia Pacific approached the high court arguing that sale of cloud services by it in India should attract equalisation levy at the rate of 2%. Since the company has already paid the 2%, the tax department’s direction creates a double jeopardy for it, it argued.
By way of an interim order, for this financial year, the high court has allowed credit of 2% equalisation levy against the 10% withholding tax liability claimed by the revenue department. The 8%, as per Google, comes to Rs 89 crore.
Google Asia would be entitled to receive its payment from Google Cloud India subject to a deduction of 8% to be paid to the tax department progressively. This interim arrangement is being made under the orders of this court. The deposit of 8% should not be treated as any non-compliance of the tax department’s order. – Delhi High Court
The issue is not unique to Google.
U.S.-based Sumo Logic, which provides online data analytics service to Indian customers, is before the high court making the same arguments as Google. Mastercard Asia Pacific Pte., too, is litigating against alleged recharacterisation of its income by the tax department.
It all started after India introduced a 2% equalisation levy on sale of goods and services that take place through foreign e-commerce operators, who don’t have a business presence in India. The intent was to tax income that foreign e-commerce entities are generating from India. Last year, the government clarified that services which are subject to tax as royalty or fees for technical services under the Income Tax Act will be out of the ambit of equalisation levy.
These provisions have became a self-goal for the government.
Many MNCs have taken the position that services like SAP implementation, training services, online support, etc. will attract equalisation levy to be paid by the foreign entity, Ajay Rotti, partner at Dhruva Advisors, explained.
They've argued there's no withholding tax obligation on the Indian entity making the payment since once equalisation levy is paid, as per the income-tax law, there’s no further liability.Ajay Rotti, Partner, Dhruva Advisors
In various public forums, however, the department has stated its position to say MNCs can’t use equalisation levy to reduce their tax liability. To be clear, the law doesn’t say companies have to pay the higher of the two—it only says where equalisation levy is applicable, income tax is exempt.
Given that equalisation levy has to be withdrawn by 2023 since India is part of the global tax deal, it’s unlikely that any clarification will be issued in the interim, Rotti opined. Eventually, courts will have to decide on a case-to-case basis whether the payments will attract a withholding tax or equalisation levy, he said.