Firms to Face 2% Tax on Internal Online Transactions

Centre proposed to widen the scope of equalisation levy in the Union Budget 2021. According to the new regulations, an online sale of goods or services is now defined as any purchase that has been initiated online, online payment, or an offer accepted online. Hence, according to experts, this new definition actually covers every transaction.

According to the newly proposed amendment, even when one of the activities such as order acceptance, order placement, supply or payments of goods and services is executed online, the gross transaction amount will be subjected to the levy.

Inter-group transactions involving multinationals and their parents or overseas subsidiaries will now potentially attract an additional 2% tax if these transactions have been executed online—either via any internal systems or emails.

Several companies are now worried if transactions such as software purchase, hotel bookings, purchasing of certain components from overseas could attract the levy. Legal experts believe that even Enterprise Resource Planning (ERP) systems, i.e. the internal software systems that most of the companies use, could also be considered an online platform technically and there is a possibility of attracting the levy. Even an email exchange within a firm and transactions made concerning internal systems could face a 2% tax levy.

The newly proposed amendment could result in the taxation of several transactions where only a part of the transaction happened online, which is quite common in all commercial transactions these days. With the government broadening the scope of equalisation levy, a new set of concerns are likely to arise for various Indian subsidiaries of multinationals.

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