Protocol based on Digital taxation may serve the Indian policies

As India drives the policy, this article assesses how a multilateral accord-based approach to digital taxation may benefit the Indian economy and the need of the time. The taxation for digital goods or services, sometimes referred to as digital tax or a digital services tax, is gaining popularity across the globe. Digital taxation consists of software programs, music, videos or other electronic files that users download exclusively from the Internet.

India in the previous decade has appeared to be a critical voice in the international tax debate, initiating developing countries’ source and market-based taxation rights. Through its participation in the G20 and OECD’s BEPS initiative, in its Press Release of July 1, 2021, the Ministry of Finance wrote that India chose an accord-based solution, which is simple to implement and allocates meaningful returns to market domains.

India has acted to a multilateral program for achieving a more equitable, stable and unbiased international tax policy management for developing countries. It was only sensible that India recently upheld OECD’s Inclusive Framework, which strives to direct tax challenges arising from the digitalisation of the economy and reallocates taxing rights for large businesses to market jurisdictions.

After the arrival of the Bharatiya Janata Party-led National Democratic Alliance (NDA) government in 2014, initially encouraged by the fact that most technology giants did not pay income tax in India despite being one of the largest markets. India’s contribution to the accelerated digitalisation was reasonably balanced with its journey to tax the thriving digital economy.

India’s First Transit

India and Israel were amongst the quickest countries to unilaterally levy a digital tax on foreign companies. While an accord eluded the powerful nations on the appropriate taxation of the digital economy, India introduced a new concept called the equalisation levy (EL) in the 2016 Budget. India levied a 6 per cent tax on the B2B online advertisement revenues of the foreign e-commerce companies. On the indirect tax front, the government started levying service tax (and later GST) on various cloud and electronic services furnished by these foreign companies in India.

Equalisation levy is an imperfect tax, a temporary arrangement at best. Prominently efficacy has been challenged because of its relevance to revenues against net income and incompatible with existing international tax principles. Furthermore, disjointed unilateral taxes have imposed an excessive burden on companies regarding compliance costs and double taxation. These arguments have also been the mainstay of the USTR investigations, which led to trade and tariff actions globally.

Equalisation Levy 2.0 Taxation

India was a pioneer of such unilateral programs with the implementation of the Equalisation Levy 1.0 in 2016. The Equalisation Levy 1.0 applied a 6% tax on non-resident companies that generated gross revenues above INR 100,000 (USD 1,500 approx.) annually from online advertisements from Indian residents or non-resident companies with a permanent establishment (PE) in India. The Indian Tax Authority (“ITA”) claims to have initiated the idea of an equalisation levy as a temporary measure and has expressed that such a levy could be revoked with the implementation of Pillar 1 and 2 Inclusive Framework.

Intending to monetise the developing digital transactions further, via Budget 2020, India proactively extended the scope of equalisation levy to charge a 2 per cent tax on e-commerce transactions carried out by foreign companies in India. The EL2.0 taxed various online sales and digital services, including digital platform services, software-as-a-service, etc.

The government's official stand is that the EL is not income tax but a tax on digital transactions and generates a level playing discipline between foreign and Indian companies. It was done to impair non-ecommerce operators from evading paying tax by claiming tax treaty benefits available for income tax.

Most companies maintain some electronic platforms to sell goods or services. As per the Finance Act, an e-commerce operator is described as a non-resident that owns, administers or runs a digital or electronic facility or platform for online sale of goods or online provision of assistance.

E-commerce services include all kinds of sales of goods and services by an e-commerce operator. Each financial year, gross revenue of INR 20 million is applied to an e-commerce operator directed to the Equalisation Levy 2.0. The EL 2.0 could have a notable influence since it covers more industries. The materiality origin is significantly lower than other unilateral approaches implemented by other tax authorities, impacting even small and medium-sized companies.

Result of digital taxation

By the delay in global consent on the Inclusive Framework, the unilateral measures passed by the Indian government have made the issues acted by the digitalised economy a certainty for many companies. It has promptly become essential to assess the implications of the Equalisation Levy 2.0, particularly with the tax optimisation possibilities when coupled with the recent ISC ruling on authorities. From a global tax management point of view, businesses must take a role in this Equalisation Levy as part of their international tax planning.

Moreover, India must watch ahead to the future. It cannot misrepresent the connection between its economic development and the ICT sector. For ICT to trigger economic growth, the tax policy should be investor and business-friendly, induce trust, promote fair competition and innovation and minimize financial risk and uncertainty. India's policy narrative today must prepare it as a home for tech companies and unicorns in the future, and so India must understand both sides of the coin.

The global answer to the digital tax problem was always a great deal for all nations. Indeed, there are several political and economic concerns involved. In an interview, Pascal Saint-Amans, director-Tax, OECD, said that the proposed global tax regime should result in significant revenue for India. The government has taken a fair stand by committing to the multilateral approach to address digitalization's tax challenges.

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