In the past decade, India has emerged as a key voice in the international tax debate, spearheading developing countries’ source and market based taxation rights (examples include India’s source rules for taxation of indirect transfers and expansion of withholding taxes to fee for technical services under India’s tax treaty network). Through its participation in the G20 and OECD’s BEPS initiative, India has committed to a multilateral approach for securing a fairer, stable and non-discriminatory international tax policy regime for developing nations. It was only natural that India recently backed OECD’s Inclusive Framework, which (amongst other things) aims to address tax challenges arising from digitalisation of the economy and reallocates taxing rights for large businesses to market jurisdictions. In its Press Release of July 1, 2021, the Ministry of Finance noted that India was in favour of a consensus based solution, which is simple to implement and allocates meaningful revenues to market jurisdictions. As India commits to walk the line, this article evaluates how a multilateral consensus based approach to digital taxation may indeed be beneficial for the Indian economy and the need of the hour.
Admittedly, unilateral digital services tax, such as equalisation levy (EL), is an imperfect tax, a makeshift arrangement at best. Notably, their validity has been questioned because of their application to revenues as against net income and inconsistency with existing international tax principles. Moreover, disjointed unilateral taxes have imposed a disproportionate burden on businesses in terms of compliance costs and double taxation. These arguments have also been the mainstay of the USTR investigations, which led to trade and tariff actions globally. According to OECD, the absence of a consensus-based solution could lead to a proliferation of unilateral digital services taxes and an increase in damaging tax and trade disputes, which would undermine tax certainty and investment. The failure to reach agreement could reduce global GDP by more than 1 per cent annually. The hope is that once a multilateral solution is reached through the Inclusive Framework, unilateral taxes will be withdrawn preventing the threat to international trade and commerce. As Rashmi Ranjan Das, joint secretary, CBDT, recently noted in an interview “We are part of the inclusive framework where there is a general agreement that once there is a consensus, all such unilateral measures will be withdrawn,” Indeed, India’s support to multilateral solution and success of global tax agreement will lay a strong foundation for its trade negotiations. A senior official from the Ministry of Commerce was also recently reported to have said that the success of global tax discussions will pave the way for the India-US trade negotiations. Moreover, once a global consensus is reached, any outlier nation is bound to feel the heat of trade and tariff disputes amidst allegations of breach of international tax principles and trade law.
Additionally, a multilateral solution seems more in line with India’s policy objectives of having practicable international tax rules that recognise market jurisdictions’ share in the profits of both traditional and digital businesses. For long now, India has advocated that profits should be attributed to market jurisdictions because of the contribution of demand side factors, irrespective of the nature of the business (digital or traditional). This is evident from CBDT’s policy statement in its draft paper on PE attribution, and the wide scope of EL and significant economic presence test. Such level of reforms (that transcend beyond digitalization) goes to the core of allocation of taxing rights, and is only possible through global consensus and not through unilateral digital taxes (which cannot be a long term stable tax policy). India’s dialogue, as reflected in Pillar One, has now been recognised by the global community as the need to reform the international tax rules for a fairer tax outcome for source countries. Similarly, on simplicity, Rashmi Ranjan Das recently explained in an interview, “any solution that is transformational may look, at least at the first instance, more complex than it is”. OECD has suggested several measures to enhance the practicability of the Pillar One solution, such as refining scope, doing away with ADS and CFB classification, etc. On the other hand, to say that EL has been simple to administer would also be a misnomer. From the get go, the levy has been fraught with ambiguities surrounding its scope, tax base and enforcement. Moreover, complexity of EL should also be seen from the standpoint of businesses that are grappling with developing internal systems for tracking transactions to meet EL compliances. This problem magnifies manifold when businesses have to meet disjointed compliances for unilateral taxes imposed globally.
Furthermore, India must look ahead to the future. It cannot belie the connect between its economic development and ICT sector. For ICT to trigger economic growth, the tax policy should be investor and business friendly, induce trust, promote fair competition and innovation and minimise financial risk and uncertainty. India’s policy narrative today must prepare it as a home for tech companies and unicorns in the future, and so India must see both sides of the coin.
The global solution to the digital tax problem was always going to be a grand bargain for all nations. Indeed, there are several political and economic considerations involved. In an interview, Pascal Saint-Amans, director-Tax, OECD said that the proposed global tax regime should result in significant revenue for India. Needless to say, the government has taken a finessed and balanced stance by committing to the multilateral approach for addressing tax challenges of digitalization.
This article was originally published in Business Standard on 29 July 2021 Co-written by: Amit Singhania, Partner; Gouri Puri, Partner. Click here for original article
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