November 8, 2021
To: either/view subscribers
Good morning. When it comes to unearthing the past, Pompeii is a gift that keeps on giving. Archeologists have now found a little room that sheds light on the “living conditions of slaves” in Ancient Rome. The room, in an “excellent state of preservation”, comes with three wooden beds, a chamber pot and several other objects. Considering slaves had no “legal personhood” according to Roman law, this room helps enrich our understanding of the daily lives of ancient Pompeians. Given that they recently found a ceremonial chariot in the same area, we can’t wait to see what’s next!
📰 FEATURE STORY
OECD’s New Global Tax Framework: Impact On India
If you’re a big company with money flowing in every second and a bloating bank balance, chances are the taxman is nearby. It’s only rational that a government charges tax on the income you earn. However, you see a haven where you can avoid taxes, and you sprint toward it. It’s a common practice all over the world.
With different countries having different tax laws and structures, companies go to the most tax-friendly ones. For the countries, it’s a competition to see who can attract these companies for investment. Make your tax laws as friendly as possible, i.e., investor-friendly. The result is a race to the bottom. The companies get away with paying minimal taxes, and there’s a race to the bottom as competition between countries increases. It’s not a good look.
Can anything be done about it? It seems something has happened. Now, it’s rare for two countries to agree on anything or everything in any bilateral situation. There’s usually a compromise in the middle. So how about 136 countries? They’ve come together and agreed on a global tax framework, the Base Erosion and Profit Shifting (BEPS) deal. India is one of the signatories. Given India’s developing economy and increased digitisation, is this deal a win, or did India give up too much for the common good?
So why is this deal important, and how did it come about? For that, we have to go back to the 2008 financial crisis. In its wake, the twenty largest world economies, i.e., G20, decided that they didn’t want to continue with the tax rules that were in place since the 1920s. They requested the Organisation for Economic Cooperation and Development (OECD) to work on a new draft for international taxation. The OECD is often called the “world tax organization.”
The result of this work was the BEPS project. Let’s first define BEPS. To put it simply, it refers to several tax strategies that help a company decrease or eliminate its tax liability by exploiting loopholes in the tax laws in different countries. So a company can adjust its accounting methods to direct profits to countries with lower taxes. From 2013 to 2015, the BEPS project saw fifteen action items to counter BEPS. However, the OECD and G20 couldn’t reach an agreement.
Following this, countries took matters into their own hands. The UK had the “Diverted Profits Tax” (DPT) in 2015. Australia had its “Netflix tax,” and India had the controversial “Digital Services Tax” (DST), which France had its own version of as well. The US wasn’t happy with the new tax rules as they resisted any taxes on Big Tech. So the OECD and the G20 began work on BEPS 2.0 that addresses the digital economy directly and indirectly.
The first component of the tax deal would mean companies like Amazon and Google pay more taxes in countries where they have customers even if they don’t have any physical property there. So companies with a global turnover of over 20 billion Euros will pay 25% of the profit. The second component is a global minimum tax rate of 15%.
The agreement finally reached is a step forward in having an international tax regime for the 21st century. The proposal is built for the modern global economy with lessons learned from old tax systems.
India has given up too much for the deal
While working for the common good is noble, there are sacrifices and compromises. That’s the case here. In agreeing to the global tax framework, India will most likely have to give up its ‘equalisation levy.’ It’s a tax on services received by a non-resident for a particular purpose. In 2016, 6% was levied on online advertisement services.
The 2020 budget expanded its scope. The levy now also included e-commerce operators. To increase its tax revenues during the pandemic, the government saw an opportunity to tax digital businesses. They, after all, saw an increase in their business operations. Due to the equalisation levy, India earned ₹2,057 crores in FY2021. With the increased digitisation of the Indian economy, India could be at a disadvantage as the thresholds for the new tax rules are high.
Some countries have lower tax rates because that’s their tool for economic competitiveness and survival. Any increase in the global tax rates may not benefit developing countries. In September 2019, India cut corporation tax rates for manufacturing units set up on or after October 1 that start production before March 31, 2023, to 15%. The US’ position is that countries should compete not on taxes but on infrastructure to attract investments. It’s an unfair stance to take.
Multinational companies are a source of foreign direct investment. They generate demand through utilising resources, and they create employment. A lower tax rate is a tool for India to accelerate economic development. India has already been in discussion with other countries on issues like double taxation avoidance and plugging loopholes. A new global tax rate has no significant benefits for India.
It’s in India’s long-term interest
Let’s take a brief global perspective that applies to India as well. It’s no secret that inequity between and within countries is a problem. The pandemic has exacerbated this. It has resulted in populist anger in some countries. The villains here are easy to spot – large multinational corporations. As these companies exploit and skirt tax laws, countries suffer.
India, for example, loses almost ₹75,000 crores a year due to international tax abuse. There’s understandable concern about developed economies reaping most of the benefits in terms of tax revenues. However, this is short-term and shouldn’t worry India. There are two long-term points of gain. First, India is on a high growth path of technology adoption. That’s natural given its economic growth potential. So tax revenue growth for India will be higher than that of developed countries. Second, India is becoming a technology innovator. As the start-up scene only grows, so will India’s tax base.
Concerning the equalisation levy, it’s not bad news that India might need to give it up. For one, the levy itself is rather complex and is a burden on taxpayers. There are doubts about its scope and applicability. Now let’s assume that the levy is withdrawn as the global tax framework is finalised and implemented. It would boost investor confidence and provide relief from implementing complex transaction tracking systems. It would send a positive message to other countries and be a big step towards ease of doing business.
Part of the global framework includes the grant of taxing rights to “market countries” so they get a share of the global profits of companies. Hence, India would stand to gain, as the right to taxation will align with the place of economic contribution. The global tax framework affects companies that use low-tax jurisdictions. However, India’s effective tax rate is still above the global minimum tax rate. It won’t affect companies that do business in India. Besides, India attracts foreign investment through a robust internal market, quality labour, and export potential.
🕵️ BEYOND ECHO CHAMBERS
For the Right:
No, demonetisation wasn’t a good idea, badly executed – it was a ridiculous idea from the start
For the Left:
Why India needs to mix foreign policy with Hindu ethos and heritage to regain footholds in neighbourhood
🏴 STATE OF THE STATES
Documenting a “heroic village” (Arunachal Pradesh) – A little village called Kaho, on the China border, is finally going to get its time in the limelight. During the Chinese attack of 1962, the residents of this village helped the Indian army weather the opposition. This became increasingly crucial as, at the time, the Indian army was heavily outnumbered by the Chinese. Now, the state’s Department of Information, Public Relations and Printing has sent a 12 member team to Kaho to make a documentary about it and its heroic residents.
Low on paracetamols (Punjab) – As the state witnesses its worst-ever dengue outbreak, rural dispensaries are so badly stocked that even paracetamols are difficult to come by. The 12,000 dispensaries under the Department of Rural Development and Panchayats were last stocked in March of 2020. This was the last time dispensaries were under that department. After the Covid outbreak, they fell under the purview of the Punjab Health Systems Corporation (PHSC). But despite reminders, the PHSC has failed to purchase any medication for the same.
The prohibition problem (Bihar) – Hooch has proved to become quite the menace in the dry state. Over the last few months, several deaths and other serious tragedies have taken place due to hooch related operations. The state BJP president Dr. S.K. Jaiswal even urged for an “exhaustive review of the implementation of the five-year old state prohibition Act”. While the government is sure to keep prohibition alive in Bihar, officials’ attention is falling on the implementation of the Act. Saying that the Act is “hard, stringent and draconian”, the Paschimi Champaran MP has also blamed the laxity in implementation for this unexpected crisis.
Engaging in sea-talk (Goa) – The third edition of the Goa Maritime Enclave is all set to take place next week. India will host the Navy chiefs of 12 nations – “Bangladesh, Comoros, Indonesia, Madagascar, Malaysia, the Maldives, Mauritius, Myanmar, Seychelles, Singapore, Sri Lanka and Thailand”. The main topic of discussion will be “the significance of interoperability” for the upkeep of everyday peace in the Indian Ocean. Given that maritime challenges in the region have gained quite the spotlight over the years, this meet would definitely be one to keep our eyes on.
Stuck between Maoists and marijuana (Andhra Pradesh) – While people of the interior tribal hamlets of the state struggle to afford one meal a day, the “middlemen” seem to thrive due to rampant ganja smuggling in the region. According to a senior police official, “They took land of tribals on lease and made them bonded labourers on their own land and made crores… And this happened under the watchful eyes of the Maoists.” Despite the Maoists heavily denying any connection to the cannabis trade, the Director General of Police D. Gautam Sawang has confirmed that the Maoists “have a cut in the trade”. Right now, the state has issued an awareness drive, urging the tribals to not take up ganja cultivation.
🔢 KEY NUMBER
50% – That’s how much the total incidence of taxes on petrol has come down to. The same on diesel has come down to 40%. This has happened due to the duty cuts imposed by the Centre over Diwali. Several states have also matched these cuts with value-added tax (VAT) reductions; thus, reducing the incidence even further.