Some of the path-breaking reforms implemented by the Modi – dispensation viz. demonetization, GST [Goods and Services Tax], Benami Law, Black Money Act etc have helped the government in bringing about a substantial increase in tax collection.
At the same time, its expenses are increasing leaps and bounds due to mammoth needs for building infrastructure [including augmenting and strengthening the military infrastructure and preparedness of our armed forces] on the one hand and adequately funding welfare schemes meant for assuring affordable housing, fuel, education and health for majority of the poor on the other.
Faced with a substantial shortfall in revenue vis-à-vis requirements, the government will need to explore new ways of garnering tax revenue. An area that offers huge potential is to tax digital transactions of offshore companies in India.
In this regard, the Central Board of Direct Taxes [CBDT] – the policy making body on direct taxes in the revenue department, ministry of finance [MoF] – has mooted a so called ‘digital tax’ on the services offered by global technology companies in the internet space viz. Google, Face book, Twitter, Amazon etc to Indian users from their bases located outside India.
Using the ‘significant economic presence’ or ‘digital permanent establishment’ [DPE] concept, the tax will be based on revenue derived from the activities of Indian users of the search engines, social media platforms and online marketplace of these companies. The tax may be levied @30% – 40% depending on the user base and revenues [only firms with a user base of over 200,000 would be considered].
This is in sync with the current practice of taxing large Indian companies @30% and subsidiaries of foreign companies in India @40%.
Considering far reaching international ramifications, the union government has entered in to consultations with 180 countries and 126 of them have supported the move. Some of the countries have already started collecting the digital tax.
It is also studying existing multilateral tax treaties as also actions planned under the base erosion profit shifting [BEPS] – a framework agreement by the OECD [organization for economic co-operation and development]/G-20 countries designed to rein in the rampant practice of global corporations [entities having operations in several countries] to show bulk of their income generated from their offshore operations in low/zero tax jurisdictions with a view to minimize their tax liability or fully escape paying tax in the source country – to guide its strategy.
Meanwhile, the global tech giants have opposed the ‘digital tax’ on the ground that their business entities being located outside India, the latter has no jurisdiction to tax the income generated from the operations. The argument is flawed.
Which country has the jurisdiction to tax income? A determination in this regard has to be based on the place where economic activity – to which the income is related – happens. For an activity happening in India and emanating from Indian users, irrespective of whether the foreign major has a subsidiary operating from India or incorporated offshore, the right to tax income remains solely with the Indian government.
This fundamental won’t change even if the transactions of the foreign company are digital. The services of Amazon/Face book/Twitter/Google via e-commerce or search engine or social media platform etc are delivered to Indian users. Clearly, the source of income for these companies is India; hence there is strong justification for taxing their income by the Government of India.
In this age of advancement in information and communication technology and global companies innovating new business models operating remotely through digital medium, the existing rules for taxing business profits based on physical presence in the source country only need to be suitably modified. Therefore, CBDT’s insistence on ‘significant economic presence’ or ‘digital permanent establishment’ [DPE] concept is a move in the right direction.
An argument that ‘digital tax’ will be interpreted as double taxation affecting trade and investment relationship is untenable. India can’t forego its legitimate right to tax income merely due the fear of likely impact on foreign investment. This is all the more when digital transactions including e-commerce are growing exponentially [the number of internet users are projected to be 635 million by 2021] and expected tax revenue from these will be huge.
Already, the tax department levies tax @6% on the payment made by a resident firm to foreign e-commerce companies for the online advertisements on latter’s platform. This is an indirect tax on the services rendered by the foreign e-commerce entity [albeit in a digital mode] which is a business activity unambiguously and inextricably related to Indian users. On the same logic, the income/profit accruing to the former from advertisement revenue is liable to tax.
The legal validity of the move to levy tax on the income/profit generated by foreign technology companies from delivery of services to Indian users/firms in digital mode – relying on the concept of ‘significant economic presence’ – can’t be called into question. Indeed, other countries are already collecting it. This is also consistent with the BEPS framework put in place by OECD/G-20.
The idea mooted by the CBDT is great. The global technology companies are making huge profits from their Indian operation which is set to increase in geometric proportions in the years ahead as internet penetration and digital transactions surge. The government should implement the ‘digital tax’ without further delay. This may be done in the 2020-21 budget – if not in the current year.