Technically, both 10% royalty and 2% equalisation levy could be applied on the same transaction but this could also lead to double taxation, say tax experts.
The company, Sumo Logic, filed a writ petition on Monday after the taxman refused to take a stand either way—keeping doors open for both approaches depending on the situation. Tax experts say while Indian entities would ideally wish to deduct 10% royalty and get done with it, multinationals may opt for 2% levy, as it could be less costly.
“In this case, a non-resident ecommerce operator had approached the tax department for ‘nil’ withholding tax certificate for payments to be received from Indian customers, citing that the subscription-based service transaction is liable for equalisation levy (2%), which was rejected by the tax authorities,” said Rahul Garg, managing partner, Asire Consulting.
“Due to lack of clarity now, Indian payers and foreign ecommerce operators are forced to pay both taxes on the same transaction resulting in double recovery by the exchequer.”
A nil certificate is essentially a procedure whereby a company can procure a document issued by the tax department that says that there would not be a tax deduction on a particular issue.
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The tax department has sought time to respond to the writ petition filed by the company. Over the years, many companies have been paying 10% royalty and 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. “This may open a new chapter of litigation for the multinationals considering its widespread implications,” said Garg.
Several multinationals could also look to explore this as a loophole for tax arbitrage, say insiders.
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.
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