The Indian government has introduced equalization levy at 2% effective from April, there is a huge possibility of double taxation on digital transactions run by companies, on any purchase such as software or hotel bookings by an Indian or India-based entity through an overseas e-commerce platform. There is a hue and cry from the US and it has launched an investigation into the digital taxes imposed by 10 countries including India, which were taxing the likes of American digital companies Google and Twitter as these companies had argued that the levy was discriminatory.
India has defended the 2% equalization levy it imposes on foreign companies for digital transactions, arguing that the levy is non-discriminatory.
There is also a lack of clarity by the companies in interpreting the levy. Several companies are being cautious and paying 12% which is royalty as they are withholding tax plus the equalization levy. Others are opting for either 10% or 2% tax. This may lead to the Tax arbitrage as the firms may explore this loophole.
To this date, many multinational companies which are paying tax in India usually sets it off against taxes paid in their home country, which may not be implemented in future.