From UPSC perspective, the following things are important :
Prelims level : Equalisation levy
Mains level : Paper 3- Global minimum tax and issues involve
The article deals with the issue of global minimum tax and how it matters to India in the changing digital landscape where data is the new oil.
Two pillars of global taxation reforms endorsed
- In the just-concluded G7 summit in the UK, the leaders endorsed the global taxation reforms premised on two pillars.
- One, that the multinational companies with at least a 10 per cent profit margin pay tax in countries where they operate and that would be 20 per cent of any profit above the 10 per cent margin.
- Two, a global minimum tax rate that envisages that multinational companies pay a tax of at least 15 per cent in each country they operate.
How companies monetise data
- The concept of tax on electronic transmission of data across borders was expressly prohibited under multiple WTO declarations.
- However, in the changed digital landscape, multinational corporations are mining big data, which has economic value, but not paying their fair share of taxes.
- Many of these tech firms provide their product for free to users, and based on user engagements, create a detailed profile of the user that would be used to sell ad space to the clients.
Efforts to find solution to tax avoidance
- The Union government had rightly introduced an equalisation levy at 2 per cent, targeted at non-resident e-commerce operators with a turnover greater than Rs 2 crore in the Union budget of 2020.
- India had an equalisation levy since 2016, initially at 6 per cent on specified services like online advertisement or provision of digital advertising space and was levied on non-resident firms, deducted by the payer.
- In the case of the amended equalisation levy, the responsibility lay with the operator and was applicable to earnings that have been made by selling advertisements based on the data collected within the country.
- The member-states of the OECD have been trying to find a solution to tax avoidance by multinational corporations under the Base Erosion and Profit Shifting Project since 2015.
- OECD had built a model around two pillars on which the G7 position has been announced.
Way forward for India
- India has to stand its ground.
- With the largest user base for Facebook, WhatsApp and YouTube, India will not be adequately compensated by the above two steps in global minimum tax.
- The government must also pass the Personal Data Protection Bill 2019 quickly so that provisions for data localisation, requiring Indian data to be stored and processed in the country are in place.
- This could be the ideal way to force tech firms to correctly evaluate the revenue generated from our sovereign data and thus tax it.
Consider the question “As the world moves towards the global taxation reforms, what are the factors India needs to consider? Also, mention the previous efforts made to find the solution to tax avoidance by the multinational companies.”
India must negotiate hard to come to an equitable position on the global tax and avoid as it harbours the largest user base of the social media companies.