Decoding India’s Approach to Digital Taxes

By Rithika Anand

Can you imagine making revenue in thousands of billions of dollars and paying taxes for the same in a few hundred crores? Seems superficial right? Not really.

In FY 2018, Facebook’s total worldwide revenue was $55,838 billion, and the revenue in India alone was ₹521 crores. Google’s revenue crossed ₹10,000 crores. But Facebook and Google paid a total tax of only ₹200 crores to the Indian Government.  Many MNCs gain an unfair tax advantage against domestic companies by escaping the taxman’s net entirely.

To cater to this problem, India introduced digital taxes in 2016. But what are digital taxes?

Well, to kick things off, take for example digital enterprises like Google, Facebook, Netflix, Amazon, etc. that operate their business in virtual space. It makes it difficult for local governments to bring them under the tax radar as it is only limited to physical business activities.

Hence, India introduced a digital tax in the form of an ‘Equalization Levy’. It was initially imposed on companies like Google for online advertising in 2016 which was followed by a 2% tax on e-commerce companies like Amazon in 2020.

One thing to keep in mind is that digital tax does not have a said definition in any law or treaty in any part of the world. It is an informal name given to a tax collected on revenue generated through digital services.

Was it only India that came up with such a taxing system? Definitely not.

Countries in Europe levied taxes that went up to 5%. Kenya imposed a tax of 2%. Similarly, various countries around the world came up with their own tax rates. Seeing all this, the US was not really happy because, at the end of the day, it was the American MNCs like Google, Amazon, etc. that were being taxed. Trade Representatives of the US felt that this was discrimination against American MNCs and was against the principles of international tax law.

The US did not stay quiet  regarding the matter and retaliated by imposing tariffs on such countries. For example, taxes as high as 25% were imposed on certain products from India.

To settle this chaos, the G20 summit and Organization for Economic Co-operation and Development (OECD) came into the picture. This meeting saw an international agreement on new global taxation rules with a participation of about 140 countries to tax digital services uniformly across the world.

“No newly enacted digital services taxes or other relevant similar measures will be imposed on any company from 8 October 2021 and until the earlier of 31 December 2023 or the coming into force of the multilateral convention,” said the OECD statement.

This said that multinational companies have to pay at least 15% of their total revenue in each country they are operating in. This would mean that companies like Amazon, Microsoft, Meta, etc. must pay taxes for their  operation in India. All the countries mutually decided that MNCs with sales over €20 billion with a 10% profitability will have to pay taxes to the government where they conduct business irrespective of their home market.

However, the 2% equalization levy imposed by India on digital players will continue for US companies until a global agreement on taxing multinational enterprises comes into effect or March 31, 2024, whichever is earlier.

The United States, on the other hand, has committed to withdrawing its threat of retaliatory trade action against India, according to an agreement reached between the two countries.

Experts believe that this deal is expected to gain India much more in tax revenue than the previous policy. India collected 4,000 crores from digital taxes alone in 2021-22. A growth of almost 100% was witnessed as compared to the previous year’s taxes of 2,057 crores.

India is a part of another tax commitment with the United Nations that has been working on putting together a new set of rules for digital taxes and is planning to implement it multilaterally. This could make things easier for India because then, it  doesn’t need not worry about the minimum thresholds and falling tax revenues, as in the case of the current taxation policy.

If all goes well for India, the Government can enjoy the additional bonus in digital tax revenues. But only time can tell if this turns out to be in favor of India, or not.