Introduction:
Over the years, we have heard about different types of taxes in our country like the very famous Income tax and other types of taxes like corporate tax, service tax, and many more. The question that may come to one’s mind is what is a tax and; why is one obliged to pay it in one form or another?
Tax is an obligatory contribution to the state revenue; the government of India imposes on the income of workers and business profits or is added; to the cost of some transactions, goods, and services. The government imposes taxes on the citizens to produce income for business projects to enhance the country’s economy and to lift the standard of living of its citizens. The Constitution of India has given authority to the government to levy tax from the nationals. This authority is given both to the State as well as Central governments. All the taxes imposed within the country need to be backed by the law passed by the State Legislature or by the Parliament.
In recent times, we have been hearing a term called “Digital Services Tax” from the word- one can figure out that it is something related to collecting taxes from platforms that provide digital services to its customers and has a large consumer base.
The question that might cross one’s mind is, what is the sudden need to levy Digital Services Tax in various countries? Well, that’s because the international tax system hasn’t kept up with the technology. Corporate taxes were designed, for the times when most businesses sold physical goods in shops. It was easy to keep track of how many products were sold and the tax generated from the sales. But now mostly everything from sales of goods to services has shifted online. Huge companies in the world like Amazon, Apple, Microsoft, and many such companies are tech companies. It is seen that for about 20 years, the corporate tax rate has steadily decreased. After such a decrease in the tax rate, the chorus in favor of, modernizing the tax system; for the digital era is growing louder around the world. Organizations like the International Monetary Fund, the European Commission, and the Organization for Economic Cooperation and Development have called for new tax laws because many companies do their business online and this; is where the idea of digital tax came in. France[1] became one of the first countries to take a step towards digital service tax when it passed a 3% digital tax on big tech companies like Amazon and Google.
How does digital tax work?
A digital tax is different from a Value added tax because it doesn’t target customers. Instead, it’s directly aimed at the companies. Digital service taxes are imposed, on multinational enterprises based on their digital activities in a specific jurisdiction. They are gross revenue taxes with a tax base that includes revenues derived from a specific set of digital goods or services and is also based; on the number of digital users within a nation. To understand the working of digital services tax, let’s understand how France has applied digital tax.
In France, the tax applies to any company that makes at least €750 million in global annual revenue from “digital activities” so, it automatically singles out a specific group of tech giants. Another condition is that those companies also need to make €25 million of their revenue in France.
The governments of the countries that are imposing; such a tax say that the goal is to make tech companies take on the same tax burden as other local businesses.
Several countries like the U.K, Italy, Spain are proposing their version of the French tax. India is also amongst those countries that have introduced its version of Digital tax.
Now that we have some idea about digital taxes let us now take; a glance at India’s take on digital taxes.
Digital Tax in India
India was one of the first countries in the world to introduce a 6% equalization levy[2] in the year 2016, but the levy was restricted only to online advertisement services commonly, known as digital advertising taxes or “DATS”. This equalization levy is; imposed on non-resident companies providing services to Indian residents. As it is, seen that the digital sector has grown immensely in recent times and, most companies benefitting from this are the advertising giants like Facebook and Google. Since these companies are located outside India and are gaining huge profits without paying taxes. This is when the government decided to bring balance by introducing a new concept in the Indian Income Tax Act. The new concept called “Equalization Levy” was incorporated in the finance bill when the Union Budget 2016-17 was announced. This new concept only focused on platforms that promoted advertising, digital or online to be precise, and that too on companies; that are non-resident companies. Equalization levy is applicable only if the aggregate amount of consideration for the advertisement services provided is more than 1 lakh rupees.
DATS was, introduced to correct specific rules in the Indian Income Tax Act. An NRI income is taxable under the Indian Income Tax Act but, the companies that do not have permanent establishments in India were not taxed, despite making huge profits from India without paying any taxes. To verify that every taxation is taxed, the Equalisation Levy was introduced in India. This was the first step taken by the government of India in the field of applying taxes on digital platforms. Tax authorities have been on the lookout for revenue from digital platforms and one of the cases where this issue has been highlighted was between ITO vs. Right Florists Pvt Ltd[3], at a Kolkata Tax Tribunal. In this case, the tax officials asked the Kolkata based merchant why it didn’t withhold tax on payments made for online advertising on search engines of Google Ireland Ltd and Yahoo USA. The assessee, a florist, paid a sum of Rs. 30.44 lakhs to these sites for online advertising without any tax. The tribunal in the year 2013 ruled in the favor; of Rights Florists 2013 stating that “such payments were not taxable in India because such payments would not be considered to be a fee for technical services in the absence of human intervention in the course of the provision of services.” The amendment introduced in the year 2016 does not support this ruling.
The Government of India did not just stop here. In March 2020[4], the NDA government had moved an amendment in the Finance Bill 2020-21 imposing a 2 percent digital service tax on trade and services by non-resident e-commerce operators with a turnover of over Rs 2 crore, effectively expanding the scope of equalization levy that only applied to digital advertising services. The new policy that became applicable from April 2020 has expanded its ambit of equalization levy for non-resident e-commerce operators involved in the supply of services, including the online sale of goods and services.
E-commerce operators must pay tax at the end of each quarter. Estimates by the USTR indicate that the value of the DST payable by the US-based company groups to India will be up to approximately $55 million per year. This will boost India’s economy. As the digital economy is growing; rapidly and becoming a separate sector of the economy itself, developed countries like the U.S where a majority of tech giants come from must understand that it would be now difficult to ring-fence the digital economy from the rest of the economy for tax purposes. It is mentioned in the bill that offshore e-commerce firms that sell through an Indian arm will not have to pay the two percent equalization levy. It means that foreign e-commerce platforms with an Indian permanent establishment, will not be subject to the two percent equalization levy. To make sure, that there is transparency the tax authorities will require the foreign e-commerce providers of goods and services in India to stipulate whether the inventory is sold by its residents or by foreign sellers on their platforms.
US’s Reaction to India’s Decision
The United States Trade Representative (USTR) is of the view that DST levied by India and other countries discriminates against U.S digital businesses because it is specifically excluded, from its ambit domestic digital businesses. The USTR investigated section 301 of the U.S Trade Act 1974, which authorizes it to appropriately respond to foreign country’s actions that is discriminatory and negatively affect U.S commerce. The section also allows the U.S president to impose tariffs and other curbs on foreign nations. After investigating for over a year, the U.S trade body announced that it would be imposing punitive tariffs on India and five other countries like the U.K, Italy, Spain, Turkey, and Austria as a retaliatory measure.
The USTR’s proposed course of action includes additional tariffs of up to 25 percent on an aggregate level of trade that would collect duties on goods of India in the range of the amount of DST that India is expected to collect from U.S companies. Around 26 categories of goods are in the preliminary list of products that; would be subject to additional tariffs. These products include shrimps, basmati rice, cigarette paper, cultured pearls, semi-precious stones, silver powder and silver articles of jewelry, gold mixed link necklaces, and neck chains, and certain furniture of bentwood. If this continues, India will be in a profit no loss situation because the taxes that it will get from the e-commerce companies will go back to their origin country that is the U.S in, the form; of additional tariffs.
India has clarified that the DST itself in, no way, discriminates based on the size of operations or country. DST may apply to U.S companies because the market for digital services is dominated by; U.S-based firms. Further, it was added, that domestic companies are subject to this tax because any company that has permanent residence in India is already subject to tax in India.
As of now, the USTR suspended the retaliatory tariffs almost immediately to allow countries to reach a consensus on international tax issues through the Organization for Economic Co-operation and Development and the G20 processes. The June 2, 2021 press release[5] by the USTR says that “The final determination in those investigations is to impose additional tariffs on certain goods from the countries who have imposed these taxes while suspending the tariffs for up to 180 days to provide additional time to complete the ongoing multilateral negotiations on international taxation.”
Conclusion
The international tax system needs reform as it does not have provisions regarding digital taxes. The U.S chambers of commerce have issued a statement saying that the world needs a multilateral solution rather than unilateral DST’s in various countries which is why the chamber is supporting the efforts to address these challenges through multilateral negotiations under the aegis of the OECD to avoid unilateral discriminatory taxes. Huge; firms like Amazon say that they would prefer a global solution over paying different taxes in every country. Some tax experts are also of the view that such digital taxes could ultimately end up; hurting the businesses and people they are trying to protect. The big companies would only pay 5 to 6 percent of digital tax as the rest would pass onto smaller businesses and consumers who use their platforms. To overcome the digital tax money companies, might increase the commission it charges merchants, which could, in turn, result in higher prices for shoppers.
Digital taxes is an interim alternative outside tax treaties that the countries have imposed. The multilateral solution at the level of the OECD will require multiple political consensuses on issues, including sensitive matters such as the setting up of an alternative dispute resolution process comparable to arbitration. Digital taxes; are a temporary solution and must be considered to be temporary as it might hurt India’s relation; with the U.S if these taxes are kept permanent without finding out any alternative at the global level. As; it might end up hurting the people that the nation is trying to protect.
References:
[1] Elizabeth Schulze, France approves digital tax on American tech giants, defying U.S trade threat, CNBC, (July. 12, 2019, 08: 58 AM EDT), https://www.cnbc.com/2019/07/11/france-passes-digital-tax-on-us-tech-firms-despite-trade-threat.html.
[2] Madhav Chanchani, Neha Alawadhi & Sachin Dave, Equalization levy of 6% on the digital ad: Government finds a way to tax companies like Google, Facebook, THE ECONOMIC TIMES, (Feb. 19, 2021, 05:50 PM IST), https://m.economictimes.com/new/economy/policy/equilisation-levy-of-6-on-digital-ad-government-finds-a-way-to-tax-companies-like-google-facebook/articleshow/51216310.cms.
[3] ITO v. Right Florists Pvt Ltd, (2013) 143 ITD 445 (Kol. ITAT).
[4] Melissa Cyrill, India’s Digital Tax: Rules Where Levy is Applicable, U.S response, India Briefing (June 03, 2021), https://www.india-briefing.com/news/indias-digital-tax-2-percent-not-applicable-foreign-e-commerce-companies-indian-arm-21956.html/.
[5] USTR Washington. (June 02, 2021). “USTR Announces, and Immediately Suspends, Tariffs in Section 301 Digital Services Taxes Investigations.” [Press release.] https://ustr.gov/about-us/policy-offices/press-office/press-release/2021/jine/ustr-announces-and-immediately-suspends-tariffs-section-301-digital-services-taxes-investigations.
0 Comments