The government is open to engaging in discussions around the minimum global corporate tax being initiated by the United States (US).
While the US initiative is aimed at addressing the threats of tax leakages being posed by tax havens across the globe, the issue of equalisation levy or digital taxes should also be addressed positively, government sources said. Tax experts point out that the new concessional tax of 15 per cent being offered by India for manufacturing companies could be threatened by the proposals, and there is a need for a careful calibration to the new regime. “While taxation is ultimately a sovereign function, and depends upon the needs and circumstances of the nation, the government is open to participate and engage in the emerging discussions globally around the corporate tax structure. The economic division and tax department will look into the pros and cons of the new proposal as and when it comes and the government will take a view thereafter,” a government source said.
In September 2019, the Finance Ministry announced a sharp cut in corporate taxes for domestic companies to 22 per cent and for new domestic manufacturing companies to 15 per cent.
US Treasury Secretary Janet Yellen recently urged the world’s 20 advanced nations to move towards the adoption of a minimum global corporate income tax. The US plan envisages a 21 per cent minimum corporate tax rate, coupled with cancelling exemptions on income from countries that do not legislate a minimum tax to discourage the shifting of multinational corporation operations and profits overseas.
“India has for long faced threats from tax havens. Now even many startups are moving to Singapore to exploit the tax arbitrage. These issues needed to be looked into. Also, if they are proposing this global minimum level, then why the opposition to equalization levy, why these double standards? We also need to note that the earlier big cases under litigation, in case of a telecom and an energy company, are also due to companies exploiting residency in tax havens, even though entire business presence and income is generated in India,” a source said, indicating the critical areas that could be under discussion.
Equalisation levy at 6 per cent has been in force since 2016 on payment exceeding Rs 1 lakh a year to a non-resident service provider for online advertisements. This is applicable for e-commerce companies that are sourcing revenue from Indian customers without having tangible presence here in the country. India — in amendments to the Finance Act, 2020 in March-end — had expanded the ambit of the equalisation levy for non-resident e-commerce operators involved in supply of services, including online sale of goods and provision of services, with the levy at the rate of 2 per cent.
“At the OECD level, discussions have been happening for several years to plug tax evasion and let countries get their fair share of tax through the BEPS (Base Erosion and Profit Shifting) initiative. Many countries are trying to tax digital companies, for instance, equalization levy has been imposed by India or digital services tax by France or the Google tax by the UK. But, the US has been retaliating against digital taxes till now, and they need to change stance on this issue as well to ensure fair treatment,”said Amit Maheshwari, partner at AKM Global.
However, the idea that after the global minimum tax, countries should not compete on taxes but on infrastructure and other facilities to attract investments — as being proposed by the US — may not be fair to all. Many countries use tax as an instrument to attract investments. “For example, India’s incentive to tax manufacturing companies at 15 per cent could be nullified if US goes ahead with this minimum tax. Also not all countries can compete with developed countries like US on innovation, infrastructure and other attributes. One problem could be that countries can artificially keep the headline tax rate higher than the minimum tax but give substantial breaks, credits to reduce the effective tax rate. This will of course reduce the incentive to shift profits to tax havens,” he said.
According to a Tax Justice Network report, $427 billion is the levy lost every year to tax abuse, committed by multilateral corporations and wealthy individuals. India’s annual tax loss due to corporate tax abuse is estimated at over $10 billion, as per the report.
“Fundamentally from India’s standpoint, our corporate tax rates are in any case above those levels being proposed, so I don’t think it adversely impacts India. My guess is India might be supportive of this US proposal because it might only help in terms building a consensus in various other areas,” said Pranav Sayta, national leader, international tax and transaction services, EY India.