From UPSC perspective, the following things are important :
Prelims level : Digital Services Tax, Equalization Levy
Mains level : Digital taxes and related issues
Digital services taxes adopted by India, Italy and Turkey discriminate against U.S. companies and are inconsistent with international tax principles, the U.S. Trade Representative’s office has said.
Do you remember?
GAFA tax—named after Google, Apple, Facebook, Amazon—is a proposed digital tax to be levied on large technology and internet companies.
Fact of the matter: Equalization Levy
- India has earlier expanded the scope of the Equalization Levy, or digital tax, to the sale of goods and services in the country by overseas e-commerce firms.
- The Equalization Levy was introduced for the first time in 2016 as 6 per cent tax on revenues earned by non-residents from online advertising and related services.
- The burden of this tax eventually fell on local firms advertising on these platforms.
Contention for E-Commerce
- In March 2020, the government expanded the scope of this levy to include the sale of goods and services in the country by overseas e-commerce operators.
- The transactions were to be taxed at 2 per cent if businesses earned more than Rs 2 crore.
- Globally, the rate of digital tax varies from 1.5 per cent (in Poland and Kenya) to 15 per cent (Paraguay). In Europe, the tax rate varies from 3 per cent (France, UK, Spain) to 7.5 per cent (Hungary).
Digital Services Taxes
- The “digital services tax” (DST) is a levy on the overall revenues earned by the supplier of specific digital services.
- The DST should not be confused with the so-called “Netflix tax,” which one may find in some western countries.
- The Netflix tax is essentially a “value-added tax” on digital services where the consumer bears the entire tax burden on the value of the final product.
The US Question
- The need to tax digital companies – the likes of Amazon, Google and Netflix – arises because these companies collect digital revenues from countries where they do not have a significant business presence.
- These are new-age companies, which can use virtual infrastructure to operate in another country.
- Countries across the globe have felt the need to tax revenues generated by such companies in a particular jurisdiction.
- Talks began in 2018 under the aegis of the OECD to formalize a framework on what and how to tax revenues earned by such companies in a country in which they have no physical or significant presence.
- But an abrupt US decision to pull out of the negotiations, involving 137 countries and threats of retaliatory action against those levying digital taxes have hit the 2020 deadline.
- USTR has concluded the digital taxes imposed by France, India, Italy and Turkey discriminate against big U.S. tech firms, such as Google, Facebook, Apple and Amazon.com
- For India, it created enormous uncertainty, since the country has always been at the forefront of adopting the concept of taxing foreign digital companies.
- It is now subject to a probe initiated by the US called the ‘Section 301’ investigations into the digital taxes.
A populist fuss by the US
- The US is a bit confused and so is the exiting President. They are not able to decide what they want to do.
- It is being argued that it could lead to tariffs before Donald leaves office or early in the administration of President-elect Biden.
- This arguably another populist measure that Trump administration wants to leave behind.
- Given that a global consensus at the OECD or even the UN level may take several more months, countries including India are likely to continue with their unilateral DSTs.
- At this juncture, when economies are reeling under the ill-effects of the pandemic, no country would want to give up its share of revenue and wait for a global consensus to emerge.