Taxing digital giants: India wants to wait until 2020 for a global solution

Although taxing digital companies like Facebook, Google and Netflix is a pressing concern for developing countries like India, the report by the task force to overhaul the 58-year old income tax Act has refrained from making sweeping recommendations to that effect, owing to the ongoing negotiation at the OECD (Organisation for Economic Co-operation and Development).

 

According to people in the know, India wants to wait until 2020 for a global solution towards taxing the digital economy, rather than being seen going overboard on the issue unilaterally. However, in case of no globally accepted solution, New Delhi will go ahead with measures to impose a levy on these digital companies.

 

The eight-member high-level panel, led by CBDT member Akhilesh Ranjan, for suggesting changes in the direct tax law submitted its report to Finance Minister Nirmala Sitharaman last week. The panel has proposed a range of reforms in the corporation and personal income tax by rationalising tax rates and proposing measures to improve compliance.

 

 “We would like to wait until 2020 for a consensus-based solution. There are no independent measures prescribed in the new direct tax report as that might be misconstrued as India going solo on the issue, which is being discussed at a global level,” said a source. However, a government official said that India may not wait beyond 2020 to levy a tax on these companies, in case no consensus is reached.

India and 128 other member countries are striving to reach a consensus-based solution under the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) by 2020 to rework the traditional international tax system to make digital firms pay taxes regardless of their physical presence or measured profits in a country.

 

 India is fighting it out with the US and the UK to push through its “significant economic presence” proposal, arguing that permanent establishment should not only require a fixed place of business and that the definition of ‘nexus’ needs to be changed to give more taxing rights to market-driven economies, or developing countries.

 

 The US, on the other hand, has been pressing for taxing digital economy through the ‘marketing intangibles’ principle and the UK through a ‘user-base’ principle.

 

 India has had bilateral meetings with several countries, including the US, South Africa and Nigeria, and more are taking place for an agreement, but a consensus seems tough. “The year 2020 is an ambitious deadline. It is unlikely that a solution could be arrived by then,” said another government official.

 

 The next meeting of the Inclusive Framework is scheduled in the first week of September.

 

 Taking the lead, India had in 2016-17 introduced a 6 per cent equalisation levy on online advertising fees to be borne by non-resident digital players. Collections from equalisation levy touched Rs 1,000 crore in 2018-19, up from Rs 560 crore in 2017-18 and Rs 200 crore in 2016-17, the year of introduction.

 

 The committee on equalisation levy had proposed the levy on digital services, too, at the B2C level, such as the download of music or apps, or payments for cloud computing. The proposed levy ranged between 6 per cent and 8 per cent.

The BEPS refers to exploiting gaps and mismatches in tax rules to shift profits by multinational companies to low-tax regimes. Internet companies operate out of low-tax jurisdictions, but do business in several others without having a physical presence and end up avoiding taxes.

 

 The OECD had estimated revenue losses due to base erosion and profit shifting an equivalent to 10 per cent of global corporate tax revenues, and created the Inclusive Forum to collaborate on the implementation of the BEPS framework.

 

 In the Budget last year, the government had proposed the significant economic presence principal under which the number of Indian users and a revenue threshold should be used to tax business profits of non-resident digital companies derived from Indian consumers. However, that requires an amendment to each double taxation avoidance agreement, making it challenging. Hence, a multilateral instrument under the BEPS framework, where all tax treaties will get amended automatically.



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