What was the need for digital tax?
Our tax system hasn’t kept up well with technology. Corporate taxes were designed for an era when most businesses sold physical goods in brick shops. Which were very easy to track the number of products sold and the tax generated from it. After a few decades sales and services shifted online. Today 5 most valuable companies in the world are all tech companies. Meanwhile, corporate taxes around the world have steadily decreased for 20 years. Looking at the example of Amazon, it paid no federal income taxes in 2018 despite bringing in a profit of more than 10 billion dollars. The favor of modernizing the tax system is growing louder around the world. Groups like the International monetary fund, the European Commission and the Organization for Economic Cooperation and Development (OECD) have all called for tax laws this in where digital tax comes in.
A digital tax is different from the value-added tax because it doesn’t target consumers. Instead, it is directly aimed at the companies.
Is it America v/s the world?
France made headlines when it passed a 3% digital tax on big tech companies. Other countries like U.K., Italy, and Spain are proposing their version of it. But the United States soon after passing the digital tax they announced an inquiry into the tax on Facebook, Google, Amazon, and Apple. India also passed a 2% digital tax which will be applicable from 1st April 2020.
As soon as the tax was applied we saw the USA opposing and even calling the taxation unfair. As the discussions continued Munchin, treasure secretary the US wrote a letter to OECD and warns the new global digital taxes. The point was that the physical operations of the tech companies are concentrated elsewhere so why they apply to taxes in other countries? Munchin added this in his letter that “I’m not going to let people take advantage of American companies because if anyone’s going to take advantage of the American companies it’s going to be us.” On the other hand, Trump also said that “But they’re our companies, they’re American companies. I want to tax those companies. They’re not going to be taxed by France or other countries.”
According to Reuters, Google and Amazon declined to comment, while Facebook did not respond to Reuters queries. India’s finance ministry also did not respond.
As the US threatens French imports to apply taxes up to 100%. On the other hand, the French president on 21st January tweeted that “Great discussion with Donald Trump on digital tax. We will work together on a good agreement to avoid tariff escalation”.
Now Nine groups, from US, Europe, Asia, and Australia wrote a joint letter to India urging that the tax be delayed by nine months. For an industry-wide consultation before implementation that means they want OECD to step in and reach a multilateral agreement”. Also, the pandemic is a great concern as companies focus on protecting their businesses.
Digital tax in India:
The Indian digital economy is expected to be worth about 200 billion dollars and is growing at a pace of 24%-25% a year. India is and has always been a huge market for companies. Tech companies (including Facebook and Google) have millions of users in India. So we are a big source of revenue for these companies. As these companies don’t have a significant economic presence (SEP) in India, they fail to pay their fair taxes. Whether there is a significant economic presence or in the normal scenario if data from India is being used or commercially exploited then India must get a share of the revenues earned from that data. There have been many discussions that the digital tax and could be levied on e-commerce companies and digital platforms. Years ago in 2016 India introduced the “equalization levy”, the levy was applied at a rate of 6% on services that include an online advertisement or any digital advertisement space but financial bill, 2020 proposes to expand the scope of the “equalization levy” to include consideration received by e-commerce operators from e-commerce sully or services, and taxed at a rate of 2% that is the revenue arising from targeted advertisements to Indian customers, revenue from the sale of data collected from India or revenue arising from the sales of goods and services using data collected from India. This levy had an effective date of 1 April 2020. Also, it is important to note that new equalization levy provisions are applicable only if aggregate revenues for a non-resident e-commerce operator exceed a threshold of Rs 2crore’s.
How practical are these?
Now the three categories that are being put forth for taxation are going to use the IP address as the basis for taxation. So what the IP address does is finds the location to India and then we also link to three different aspects first is advertising in India, second is selling the goods and services in form of data belonging to the residents of India, and third is selling goods and services based on data collected about Indians. Now we don’t realize but it is going to be very difficult to be being able to connect them because there are going to many different sets.
Advantages of digital tax:
- Now if one wishes to trade with other countries, you need not have to require an office or permanent establishment, you can make a website and starts supplying goods and services.
- As we have seen revenues were never earned on data, it was never considered as good but now revenues will not be unquestionably lost. The government will be able to collect additional revenue.
- As digital taxes will increase the companies will in turn increase prices of goods on the e-commerce sites. This will encourage competition between virtual sites and brick and mortar stores. While a vast majority of transactions are still conducted in stores near where consumers live, these stores have undoubtedly lost customers as a result of e-commerce.
- India is a too big market to ignore so the digital taxes would encourage innovation within the country to shine out.
Disadvantages of digital tax:
- India is treating data as goods but we should keep that in mind that whatever the bills may say we should take care of personal data protection bill because firms are going to pay tax on data and they will try to use it efficiently.
- Almost every giant firm operates from Silicon Valley, America. The American government will retaliate against countries taxing Silicon Valley.
- Silicon Valley will itself react. It is unclear how these big tech firms will react as their profit margins will be thinner. The other side is that they could threaten to pull out of the market, leaving India with no direct substitutes.
- Another possible outcome is that we could lose the investment. The big tech firms could see it as a sign to invest in other markets.
It is fascinating to see how technology has inserted itself into foreign policies and geopolitics. If we look at the scenario both the Modi government and big tech have a lot at stake. All we need to do is find out a midway which is rational where the companies have a say on how they are taxed and how much should the pay as well as government keep their conditions beside them. It would keep the flow going and we don’t have to rely on Chinese substitutes. We hope that our policymakers would consider its impact on our foreign relations.