Digital taxes and related issues : "EMPOWER IAS"

 Context:

• Last month, a United States Trade Representative (USTR) investigation report found India’s Digital Services Tax (DST) to be discriminatory. 
• It said the tax is “inconsistent with prevailing principles of international taxation”, and burdens or restricts U.S. commerce.
• Section 301 investigations are unilateral in nature, because the USTR is essentially deciding whether a measure is violative of the U.S.’s rights.
• India has denied these charges. 

 

 

Background:

Digital Services Taxes (DSTs):

• These are the adopted taxes on revenues that certain companies generate from providing certain digital services. E.g. digital multinationals like Google, Amazon and Apple etc.
• The Organisation for Economic Cooperation and Development (OECD) is currently hosting negotiations with over 130 countries that aim to adapt the international tax system. One goal is to address the tax challenges of the digitalization of the economy.
• Some experts argue that a tax policy designed to target a single sector or activity is likely to be unfair and have complex consequences.
• Further, the digital economy cannot be easily separated out from the rest of the global economy.

 

How does India’s DST evolved?

• In 2016, Akhilesh Ranjan Committee suggested to create a level-playing field between online businesses and brick-and-mortar businesses.
• Since digital businesses don’t have physical presence but enjoy a sustainable economic presence they need to be taxed.

• In 2016, India became the first country to implement the equalisation levy, on advertising services at 6%.
• In 2018, India introduced the term significant economic presence in Income Tax Act.
• According to which, if a company had users in India, it sort of defined its economic connection with India and therefore gives India the right to tax.
• In 2020, the new equalisation levy expanded its scope even to e-commerce.

 

Need

• Base Erosion and Profit Shifting: Multinational  Firms make profits in one jurisdiction, and shift them across borders by exploiting gaps and mismatches in tax rules, to take advantage of lower tax rates and, thus, not paying taxes to the country where the profit is made.
• The need to tax digital companies - the likes of Amazon, Google and Netflix - arises because these companies collect digital revenues from countries where they do not have significant business presence, which in tax parlance is referred to as permanent establishments.
• These are new-age companies, which can use virtual infrastructure to operate in another country.
• The Akhilesh Ranjan Committee Report had suggested that in order to create a level-playing field between online businesses and brick-and-mortar businesses, digital businesses which do not have a physical presence in India but are able to enjoy a sustainable economic presence should be paying a certain amount of tax. 

 

Criticism:

• The US investigation finds that India’s equalisation levy discriminates against U.S. companies in particular. 
• DST taxes a company’s revenue rather than its income. This is inconsistent with international tax practice that income, not revenue, is the appropriate basis of corporate taxation. 
• Taxing revenue for digital transactions as location-specific rent is more feasible than a digital presence, because it would lead to lesser compliance costs.
• DST taxes companies with no permanent establishment in India, contravening international tax principles. 

 

Issue: Taxing digital economy

• The Base Erosion and Profit Shifting (BEPS) programme by the OECD [Organisation for Economic Co-operation and Development] was launched by the G20 countries. 
• Under the 15 action points, action point one was to look at the tax challenges of the digital economy. 
• The main problem was to find a new way of taxing digital companies that are not adequately taxed because of how the rules are designed. So, the primary concern was that companies don’t have a physical location in the markets where they operate. 
• India has been engaged in the global discussions at the OECD level. 
• Even other countries introduced DSTs like India’s equalisation levy. 
• India has always maintained that once there is a global consensus, it would cease to keep the equalisation levy in force. 

 

OECD BEPS Project:

• A key issue on the OECD agenda is the “digital services tax” (DST), which is a levy on the overall revenues earned by the supplier of specificdigital services.
• The OECD, under the authority of the Group of 20 countries, has considered ways to revise tax treaties, tighten rules, and to share more government tax information under the BEPS project, and has issued action plans.
• In the early versions of the Base Erosion and Profit Sharing (BEPS) report on the issue, the Task Force on Digital Economy at the Organisation for Economic Co-operation and Development (OECD) mentioned three measures — an equalisation levy, withholding taxes and a new nexus rule.
• While in principle it was agreed that data and user participation are critical for a platform, no consensus emerged on their economic contribution. 

 

Way forward: 

• OECD process: The position that India has taken is to remain committed to the OECD process, to influence it, and to say that there are ways to tweak this design.
• The United Nations has proposed an automated DST which is to say that within the existing treaty framework today, we introduce a withholding on payments that are made from markets to jurisdictions. 
• Bilateral pacts: India should apply the DST and then allow countries to bilaterally negotiate with their respective partner countries a process of crediting this tax.