As the world stares at a looming recession, “Big Tech” businesses are thriving globally. E-commerce, subscriptions, and distributed business infrastructure have emerged as major revenue drivers. This has led more countries (Brazil, Spain, Czech Republic) and the European Union (EU) to consider and charter a domestic path towards digital taxation, as a source to augment the languishing fiscal revenues. These are popularly known as Digital Service Taxes (DSTs).
As most Big Tech businesses are headquartered in the United States (US), as a measure of countering growing “protectionism”, the US has decided to investigate the DSTs adopted or under consideration by 9 countries, including India, and the EU. These investigations will be undertaken under the US Trade Code, which empowers the US Trade Representative (USTR) to respond to actions of other trading partners that are perceived to be unfair or discriminatory.
In India’s context, it contemplates an inquiry into the recently enacted Equalisation Levy (EL) on non-resident e-commerce companies. The origin of the EL dates back to 2016, when India enacted a 6 per cent EL (EL 1.0). It was confined in its scope to transactions relating to online advertisements or provision of digital advertising space by non-residents to Indian residents. Recently, in March 2020, surprisingly, the scope of EL was expanded (EL 2.0). The provisions of EL 2.0 are broad and can potentially affect all ‘online’ transactions undertaken by e-commerce entities with Indian consumers. It is charged at the rate of 2 per cent on the consideration received by e-commerce entities for inter alia online sale of goods and/ or services. The levy announced in late March is made applicable from 1 April itself, leaving businesses with very little time for planning and implementation. The EL provisions are unilateral and are unlikely to be eligible for a credit in the home country.
The OECD does recognise the need to reform international tax rules for taxation of digital businesses but so far hasn’t arrived at a consensus on the scope and manner of taxation. Meanwhile, several other countries have also jumped on the digital tax bandwagon and enacted their own DSTs to tax digital multinationals. This has only magnified the problem. At a fundamental level, India EL and DSTs enacted (or proposed) by other countries have certain common features. The unilateral actions undertaken by countries bring to the fore certain profound questions:
1. Whether with the advancements in technology and emergence of digital business models, it is possible to create value in user jurisdictions without attracting any tax liability;
2. Whether the trend of enacting unilateral levies put in motion by India would not disturb the existing international tax architecture and trigger the incidence of double taxation;
3. Whether an imposition of a flat rate of tax on gross revenue, bearing no relationship to profits, would be inequitable;
4. And, more significantly, whether such a levy would conform to a country’s existing international trade commitments.
As policymakers and tax administrations over the world continue to grapple with these problems, the recent announcement of investigations only makes the situation more precarious. One does not need to venture too far to appreciate the scale of the problem. The USTR had recently undertaken a similar investigation for the French DST: a 3 percent levy on gross revenues generated from digital interface and targeted advertising services provided in France. The investigation concluded in December 2019 that the French DST is discriminatory against US companies and was found to be inconsistent with prevailing principles of international tax policy as well as unusually burdensome for affected US companies. In the wake of these findings, the USTR proposed imposing tariffs of up to 100% on a variety of French imports with an approximate trade value of USD 2.40 billion. Following the tariff threat, France decided to defer the tax collections till 2021.
The introduction of DSTs and/or EL has certainly politicised tax and has pushed countries towards adopting unilateral actions. This inward-looking lurch has also undermined the OECD efforts, working towards negotiating and integrating a multilateral solution on the final scheme for taxation of the digital economy. The experience of investigations of the French DST only gives a bleak scenario - a new round of tariff and retaliatory measures, intensifying the tensions in a global trade order already marred by the pandemic.
(Kanabar is CEO, Dhruva Advisors, while Kapadia is partner and Rakhecha, senior associate in the firm)