The road ahead for digital tax in India

The road ahead for digital tax in India

In a country that has over 560 million internet users and a buying economy of USD 250 billion, it is only the next natural progression for India to bring companies who have a digital presence in the country under the tax ambit. India’s decision to levy a digital tax has paved the way for a probe by the United States who is not in favour of India's equalisation levy. 

What you must know about the Equalisation levy and the Significant Economic Presence amendment? 

The Equalization Levy is a tax aimed at foreign digital companies. Now, this tax has been levied since 2016 and was taxed at the rate of 6% on gross revenues from online advertising services. However, since April 1st this year, the ambit of this tax was significantly expanded to include online eCommerce activities at the rate of 2% tax. Additionally, the transactions will be taxed at 2% if businesses earned more than ₹2 crore annually. 

Why is this important for India? For starters, the revenue generated from Corporate tax in a country is extremely significant and as of September 2019, India cut the corporate tax rate to one of the lowest among Asian countries. This was obviously done with a view to attract increased foreign direct investment and to establish India as the next global manufacturing hub. But the outbreak of the Coronavirus along with the subsequent nationwide lockdown has significantly delayed the establishment of manufacturing facilities in India. Obviously it is going to take a while for the economy to backtrack but heavy rate cuts in corporate tax will not fly well at such a time. An equalisation levy (which is still lower than countries like France who tax digital businesses at 3%) can help India get back on the track to economic growth. 

In addition to the equalization levy, India introduced the concept of Significant Economic Presence for the purposes of expanding the purview of corporate income tax. The SEP included tax on:

  • Advertisement which targets a customer residing in India or who accesses advertisement through internet protocol (IP) address located in India.
  • Sale of data collected from a person residing in India or who uses an IP address located in India.
  • Sale of goods/services using data collected from a person residing in India or who uses IP address located in India.

The Independent Commission for the Reform of International Corporate Taxation (ICRICT) in a report titled ‘The Global Pandemic, Sustainable Economic Recovery and International Taxation’ that was released in June 2020 has listed five measures that Governments across the world should be considering to tackle tax avoidance. These measures include – 

  • Higher corporate tax rate for large corporations in oligopoly sectors with high rates of return. 
  • Set a minimum effective corporate tax rate of 25% worldwide to stop base erosion and profit shifting. 
  • Introduce progressive digital services taxes. 
  • Publicise country by country reporting for all corporations benefiting from state support. 
  • Publish data on offshore wealth for adopting effective progressive wealth taxes on residents, and income tax rates on highest income taxpayers.

Like a number of other countries, India too is likely to implement a progressive digital services tax structure to make the most of an economy that is driven by companies with a high digital presence. This pandemic has borne witness to the fact that digital business is crucial to Indian revenue. The strategy is in line with the Organisation for Economic Co-operation and Development (OECD) BEPS Action 1 report from 2015, to bring digital giants within the realm of local taxes. While the United States is not happy with the equalisation levy and claims that their country is being targeted as most digital giants having a prominent presence in India including Facebook, Google, Netflix, Amazon etc are American born and bred organizations, India has clarified that the decision to levy a digital services tax is not aimed at their country alone and that India will not be reconsidering their decision. 

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