NEW DELHI: The government may face challenges in imposing the new equalisation levy since the onus of paying the 2% tax will rest with foreign firms rather than consumers in India, analysts said.

The tax is on global companies that offer digital products and services to Indian residents. It comes into effect from April 1 after the government expanded the scope of the levy to all overseas e-commerce transactions originating from India in the amended Finance Bill that was passed by Parliament on Monday.

These companies may ask the government to defer the levy till there is global consensus on taxing cross-border digital revenue, they said.

They may also seek the deferral for at least three months citing impact to business due to the current lockdown to contain the spread of the Covid-19 virus outbreak.

“As equalization levy is not a part of income tax, it may add to the cost of operations for foreign companies,” said Neeru Ahuja, Partner, Deloitte India. “They may not get credit for the equalization levy in their residence country or avail favourable treaty benefits.”

This will make companies set up local operations in India for compliance and push costs on to customers, she added.

The new rules will hit all companies with sales of more than Rs 2 crore in the previous financial year.

Technology, internet and Software-as-a-Service (SaaS) companies — including Microsoft, Adobe, Google, Facebook, Netflix and Airbnb — all of which offer some services through their overseas arms, are likely to be impacted.

India first imposed the levy in 2016.

The Google Tax, as it came to be known, mandated advertisers on platforms such as Google and Facebook to deduct a 6% levy before making payments. They had to deposit the levy with the government. The imposition saw a major pushback from global firms.

Nehaa Chaudhari, policy director at Ikigai Law, said the intent behind the move was clear — to get digital companies that have a huge user base in the country to pay more taxes in India.

“It has been a longstanding complaint of the government that multinationals don’t pay enough taxes in the country,” she said. “The government’s argument is that foreign tech companies have a large number of users, and so a significant presence in India and make money off data – which is an asset today — but don’t pay appropriate taxes on the revenue generated here.”

Earlier this year, India proposed changes to the Income Tax Act that will make an overseas platform that advertises, streams or sells goods to an Indian IP address taxable in the country.

For many large digital companies, India is the largest market in terms of user base and experts have been saying that tech giants need to pay taxes according to the number of users they have in any jurisdiction. India hopes the equalisation levy will garner it a small slice of the $100 billion in global taxes that these firms pay.

Google, Facebook, Twitter, Adobe, Microsoft, TikTok and did not respond to ET’s queries.

“Unlike the earlier levy (on advertising), now the foreign ecommerce operator will be required to make compliances in India which could also raise potential challenges,” Rakesh Jariwala, Tax Partner – Technology, Media & Entertainment, and Telecom practice, EY India said.

“Another area where difficulties may arise on coverage, measure and substantiation will be applicability of levy to non-resident to non-resident transactions that use Indian data where OECD is still developing consensus on taxable nexus and allocation of taxing rights,” he added.

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