As the lack of implementation of digital taxation towards multinational tech giants becomes increasingly acknowledged, governments are seeking ways to correct this. Being the second-most populous country with a large online presence, India is following suit. The Central Board of Direct Taxes (CBDT) – India’s policy-making body for the income tax department – is reportedly looking to send a bigger tax bill to global tech giants who invoice their revenues out of India and operate in the country with minimum profits. The CBDT seeks to set a revenue threshold of Rs 20 crore (US$288,000) and a limit of 500,000 users above which non-resident technology companies such as Google, Amazon, Facebook, and Apple (GAFA) would have to pay direct taxes on profits earned locally. The restrictions are part of the ‘Significant Economic Presence’ (SEP) concept that was introduced in India’s 2018 budget. The government is currently considering if the SEP could be made a part of the draft Direct Taxes Code, which is expected to be submitted to the Finance Ministry relatively soon.
India’s drive to implement this digital tax comes a month after the country’s income tax department began investigating Facebook and Google for underreporting revenues. The two companies were accused of withholding tax on equalization levy imposed on them. In the past, other multinational tech companies had also been accused of paying very little taxes locally despite earning significant revenue and profits from offering services such as online advertising to customers in India. For example, the Economic Times claims that between fiscal years 2014-2018, Google had remitted over $2 billion to its subsidiaries in Singapore and Ireland. The remittances, disputably classified as costs for “purchase of advertising space”, amounted to 50-60% of its overall revenue in India over the period.
The CBDT’s new plan is not India’s first attempt in addressing the digital tax issue. In June 2016, India had come up with a “Google Tax”, an equalization levy that taxed digital advertising. The withholding tax of 6% was for the advertisement on their sites, instead of a corporation tax of 40% imposed on other firms. The policy reportedly generated over 10 billion rupees (US$139 million) by 2018.
Hoping to improve on past taxation attempts, India follows a series of other nations that share the same sentiment of tech companies getting away with paying little to no taxes. Earlier this year, France devised a proposition to tax Google, Facebook, and Amazon. Officially approved last month, the 3% digital tax would apply to companies that generate consolidated digital revenues over 750 million euros and get 25 million euros from revenues in France. Before both countries compromised, Trump had initially responded by threatening to retaliate with tariffs on imported wine from France. France will now continue to tax American tech companies until the intended Organization for Economic Co-operation and Development (OECD) tax comes into place, which they hope to reach an agreement by 2020. France will repay the United States if their current taxes exceed the future intended tax.
While India may use the potential tax increase to invest more in other markets, implementing the taxes may lead to retaliation from the United States whose companies have a strong presence in the country. Trump has already felt provoked by current tariffs from India, which he deemed “no longer acceptable” during the G20 summit in June. Trump’s White House also considered capping H-1B visas, a temporary work visa for foreigners, when US tech companies were faced with the prospect of data localization by India. Given this, India’s push for digital taxation will likely provoke similar reactions from the White House. The imposition of taxes going forward might take away the incentive to innovate for the Indian consumer. It could also translate into slower deployment of new AI-based technologies by large tech corporations. On the other hand, with over 300 million Facebook users, India may be too big of a market to ignore for big tech companies.
Despite India not having domestic substitutes for most American big tech firms if they do decide to leave, Chinese ones could fill the void. In recent years, China has developed a stronger hold in the Indian market. In the past year, for example, Beijing-financed Ola and China’s Alibaba group pumped in $680 million to Paytm, India’s largest mobile wallet operator. China is also competing big in the social media market, with a contentious offering, Tiktok, being one of the most active user-generated content apps in India. should GAFA threaten to leave, China could create a stronger online presence in India, potentially humiliating the US.
It is also important to note that the OECD is developing new digital tax rules that would be presented for adoption internationally at the end of 2020. The 129 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) adopted a “Programme of Work” laying out a process for reaching a new global agreement for taxing multinational enterprises. The document centers around two pillars. The first pillar will explore potential solutions for determining where tax should be paid and on what basis, as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located. The second pillar will explore the design of a system to ensure that multinational enterprises pay a minimum level of tax. This pillar would provide countries like India with a new ability to protect their tax base from profit shifting to low or no tax jurisdictions and is intended to address remaining issues identified by the OECD/G20 BEPS initiative. Angel Gurria, Secretary General of the OECD at the Group of Seven summit in France emphasized that the world is “seeing a very strong and a very clear signal of wanting to find a multilateral solution”. With India as a party to the Inclusive framework on BEPS, a multilateral solution – if implemented – could altogether alter its intended tax policy. Unquestionably, countries are allowed to have different corporate tax rates. However, it is about allocating “residual profits” to jurisdictions – based on some measures, one of which is significant economic presence.
Therefore, countries like India should wait for the OECD BEPS taxation program to run full its full course and avoid any unilateral tax decisions ahead of 2020. Doing so beforehand could be in vain and have tremendous negative implications for small businesses and other players in India’s digital marketplace.
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