India: Tax withheld reduced by “equalization levy” (digital services tax) paid (court decision)

Indian entity making a payment to a foreign taxpayer was permitted to withhold tax at the rate of 8%

Indian entity making payment to foreign taxpayer was permitted to withhold tax at 8% rate

The Delhi High Court recently held that an Indian entity making a payment to a foreign taxpayer was permitted to withhold tax at the rate of 8% instead of 10% as provided under the applicable tax treaty because the payment was already subject to the 2% “equalization levy” (digital services tax).

The taxpayer (based in Singapore) was in the business of providing “cloud services” in India.  

The case is Google Asia Pacific Pte Ltd v. CIT (W.P.(C) 215/2022).

KPMG observation

The equalization levy is applied to consideration received by e-commerce operators from e-commerce supply or services. The Finance Act of 2021 clarified that the equalization levy will not apply if payments are taxable as royalties or fees for technical services (FTS) under the Act and thus subject to application of any relevant tax treaty. When a payment is not taxable as royalty or FTS, however, the equalization levy may apply.

Read a February 2022 report [PDF 189 KB] prepared by the KPMG member firm in India

 

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