Domestic start-ups and small to medium enterprises (SMEs) in the country have reportedly written a letter addressed to the Revenue Secretary Ajay Bhushan Panday.
The letter raised concerns on the equalisation levy that applies to small companies for rendering services from foreign companies in India.
The equalisation levy requires SMEs and start-ups to pay a direct tax on payments made to foreign headquartered companies for advertising or similar services rendered in the country. The levy, however, has led to an increase in operational costs for such small scale companies.
Earlier during the month, LocalCircles – an entity which represents the start-up sector in the country – had met with the Revenue Secretary to discuss the impact of direct and indirect taxes on the start-up sector. Among the various issues discussed in the meeting was the equalisation levy.
The letter also mentioned that start-ups and SMEs have been receiving invoices from foreign companies despite the latter’s overwhelming market performances. The equalisation levy requires domestic companies to deposit 6% on behalf of international companies.
With the equalisation levy in place, the companies are now finding themselves burdened with increased operational costs and additional compliances.
The letter pointed out that SMEs and start-ups were receiving invoices from abroad for services rendered within the country. Furthermore, with the equalisation levy being a form of tariff, the costs incurred cannot be claimed under Input Tax Credit by the small companies.
The companies pointed out that, in addition to compliances and increased costs, the government was also losing out on its tax revenues. Invoices issued abroad do not fall under the government’s tax ambit. Hence the loss in tax revenues.
The letter also requested the government to mandate foreign companies to invoice their clients through a registered India for the services rendered in the country. Rectifying the issue will ensure that the government also does not lose out on its tax revenues.