Did you know that amidst the Covid-19 pandemic that resulted in several businesses moving from in-person meetings to digital interactions, the Government of India has introduced Digital Tax via Finance Act, 2020?
Amidst all the gloom and doom of the Pandemic, the introduction of Digital Tax in India is being hailed by many as a welcoming move.
Direct and Indirect Tax
Tax in India can be segregated into; Direct and Indirect tax.
Direct tax refers to the type of tax where the burden of tax can’t be transferred to another person or entity. It is the type of tax where the individual or an entity on which such tax is levied, will alone be liable to make payment of the same to appropriate authority. Direct tax is usually levied on a person’s or an organisation’s income or profits. Income Tax is one of the best examples of Direct tax; it is the tax levied on the income of an individual or organisation, earned during a particular financial year. The amount payable under Direct tax may vary from one person to another on the basis of his or her income or profits.
Indirect tax on the other hand is one, where the burden of the tax is transferable. Indirect tax is levied upon goods and services and is usually payable by the end-consumers. The Goods and Service Tax is a classic example of indirect tax. The amount of tax levied under Indirect tax is constant with respect to the products or services on which they’re levied.
In keeping with the rapid digitisation of the world, most developed countries in the world are increasingly bringing into effect a form of tax, most commonly known as ‘Digital Tax’.
Digital Tax refers to the tax levied on digital goods or services or digital business activities. Digital goods refer to products or services that rely upon the internet to function and have minimal human involvement. It is pertinent to note that there’s no universal treaty governing digital tax, though the Organisation for Economic Co-operation and Development (OECD) is on the verge of introducing the same.
With the increasing emphasis on internet related services provided on digital platforms, many top developing countries with a view to increase tax revenue from cross-border digital services, have introduced Digital Tax.
The Evolution of Digital Tax
Top global digital companies often attract a large part of their consumers from foreign countries. For instance, World’s top digital companies like Google, Facebook, Amazon etc., have their establishments in America, yet derive a huge part of their revenues from consumers based in foreign countries without making considerable tax payments domestically in the respective countries, by virtue of operating on a digital medium. Most of the digital companies base themselves in jurisdictions where the tax levied on them is considerably low, with a view to minimise their tax liability.
Unlike regular companies, digital companies weren’t liable to pay any import duties when they entered and served in a foreign country as it would have been impractical to levy tax on data or digital related services. And this enabled digital companies to escape making tax payments in the countries where they provided services. Further the companies could show all their profits at their headquarters, which can be situated in the jurisdiction of a state that levied a low-tax charges.
Therefore an important reason identified by various countries that led to the advent of digital tax is that there is an irregularity between where the profits are taxed and where the actual value is created. It had been proved that to a certain extent the revenue generated through digital companies is in foreign countries by virtue of their users, where they don’t even have an established company in such countries. Most of such companies generated their revenue from their interactions and engagement with the user interface across the top ten countries in the world. And digitalization had not only enabled the companies to seek new competitive advantages because of the digital medium but also has provided them ample opportunities to avoid taxation. For instance digital companies like Facebook, Instagram, EBay etc, provide e-commerce services by various means and yet escape their tax liability for the same by making their tax payments at their headquarter jurisdiction.
Thus, the need to levy tax where the value is created by the digital companies has come into the picture and as a result Digital Taxation has been introduced.
The Singapore Finance Minister, Heng Swee Keat, during his speech about Digital Tax in 2018, had said: “Today, services such as consultancy and marketing purchased from overseas suppliers are not subject to GST. Local consumers also do not pay GST when they download apps and music from overseas. This change (introduction of Digital Tax), will ensure that imported and local services are accorded the same treatment.”
Countries that have enforced Digital Tax
Digital tax has been enforced by various countries in accordance with their statutory provisions. Some of them are as follows:
United Kingdom- In the UK any business providing a digital service in the form of search engines or e-commerce, need to register themselves to pay digital tax in the form of DST (Digital Service Tax), which is levied at a rate of 2% on the revenue derived from the users based in UK. The said form of tax came into force in UK on 1st April, 2020.
France: In France, DST was introduced in the year 2019. DST here, not only affects digital companies but also businesses that possess a digital model. DST is imposed at a rate of 3% on the gross revenue which is derived from digital operations where the users based in France play a vital role in creation of value.
Australia: Australia had introduced the taxation on digital goods by including the same in their Goods and Service Tax. Businesses engaged in cross-border supply of digital goods need to pay 10% Goods and Service Tax in Australia. These measures were introduced in Australia in 2017.
Russia: Russia has introduced measures to tax digital goods by levying the same through VAT (Value Added Tax). The foreign companies that sell their digital goods or services to customers who are residents of Russia, will need to charge a VAT of 20% and pay the same to the Russian Tax Department.
Digital Tax in India
India has an interesting approach towards taxation on Digital Goods and Services. India had introduced equalisation levy in the year 2016, where it levied tax at the rate of 6% on non-resident digital companies that provided online advertisement services in Indian domain. (Section 165 of Income Tax Act, 1961) As a result of this during the fiscal year 2017-2018, the revenue from the equalization levy was Rs. 550 crore.
Initially, GST (Goods and Service Tax) was applicable on all goods and services being sold to an Indian consumer or business by either an Indian entity or a foreign entity. Under this mode of taxation where the supplier was a non-resident entity, the service recipient was liable to pay GST under Reverse Charge Mechanism. It was the responsibility of the service recipient to pay GST to the government and not the liability of the service supplier to pay GST to the government.
But with the implementation of the latest Finance Act of 2020, the scope of equalisation levy has been widened and digital tax at a rate of 2% shall now be levied on any e-commerce operator who receives any consideration for e-commerce supply or service, from an Indian consumer or recipient. It is to be noted that the above mentioned digital tax is levied only on non-residential e-commerce companies, where the per-annum revenue/consideration received by the said company is not lesser than Rs. 2crore. (Section 165A of Income Tax Act, 1961). The burden to pay the said tax shall be on the non-residential e-commerce company that provides services on digital platform to customers based in India. Previously when the same was regulated under the scope of GST, the burden of paying the Tax was on the service recipient.
Digital tax and its repercussions
It is an interesting fact that most of the digital companies that have been subjected to Digital Tax are American based. And levying of tax on such digital giants has attracted retaliation from the US government.
This was the case when the government of France first introduced Digital Tax and implemented the same on digital companies like Google, Facebook, Amazon etc. The US government went so far as to threaten France with retaliatory tariffs against French goods.
Similarly, now India has implemented digital taxation on e-commerce activities and the US government has asked India to reconsider its e-commerce policy..
Therefore the need for a universal model monitoring and regulating cross-border Digital taxation exists. Hopefully the OECD will soon come up with the same to ease the repercussions of State-implemented laws relating to digital tax.
With the ever-increasing ease of doing business through online platform one can surely admit that the digital means might become the sole platform for conducting business in the coming days. Various countries have rightly identified the benefits of the same and have begun with implementing taxation on such digital goods and services which are traded through the digital medium, to maximise their revenues effectively.
- K SUMANTH GOWDA