August 1, 2024
📰 FEATURE STORY
Was scrapping the “Google Tax” a good idea?
The 2024 Budget focused a little on how India’s digital landscape has evolved and its importance to economic growth. We’ve come a long way thanks to digital public infrastructure like Aadhaar, UPI, etc, as the government has ambitions for the country to become a $1 trillion digital economy.
One proposal, the equalisation levy, also known as the Google Tax, was scrapped. This is a charge imposed on digital services provided by non-resident companies. The government hopes that this will help startups in the long run. But will it also result in a setback for the government with no tax revenue from foreign companies doing business with Indian users?
Context
A recent Reserve Bank of India (RBI) report showed that India’s digital economy is expected to make up one-fifth of GDP by 2026. Digitisation has opened new possibilities for Indian businesses, the government, and consumers. Apart from digitisation in the banking and financial sector, there has been a revolution in how Indians shop, whether it be for groceries, clothes, accessories, etc.
How has this happened? Over the past decade, internet penetration has increased and reached 55% last year. The cost per gigabyte of data is the lowest globally in India, at an average of ₹13.32 per GB. That’s about $0.16. We’ve also got one of the highest mobile data consumption rates globally. Last year, the average per-user per-month consumption was 24.1 GB.
This means the Indian consumer has never had this many choices and opportunities. Companies began to notice and decided to expand in the online space. Companies like Flipkart and Reliance came to the fore.
Then big guns from abroad, like Amazon, wanted a piece of the action. As they began to grow and expand their operations, there was more at stake when the government made policy decisions.
With the accelerated growth, there was a necessity to address the challenges of taxing online transactions. For companies like Google and Facebook, for example, a big chunk of their revenue is from outside their country of residence. They didn’t have to pay any taxes in India.
That changed in 2016 when a proposal was introduced in the Finance Bill. Eventually, it became a 4% tax on foreign companies’ revenue from services rendered to an Indian resident. Then came the 2% tax on e-commerce transactions that foreign companies carried out in India. This was the equalisation levy.
Some companies, especially those based in the USA, weren’t happy and called the tax discriminatory. The US even retaliated with a 25% tariff on goods imported from India. With that levy no longer there, has the government done the right thing?
VIEW: It’s the right call
It’s understandable why India wanted such a tax. The hope was to get a chunk of the $100 billion in global taxes paid by digital companies. However, the equalisation levy was the wrong approach. It was a contentious policy in the first place. The government also wanted it to have a level playing field for domestic e-commerce companies that were liable to local tax laws. But it snowballed to something bigger and became a point of contention with the US. Since the government has decided to scrap it, tax experts say this will lead to better tax compliance.
For foreign companies, the compliance cost was very high, and tax collection was shoddy. The levy was too broad and often extended beyond typical digital business models. There was a lot of confusion on the classification of services to determine if they were subject to the levy or could be taxed as royalty or a fee. Another point to note was the levy wasn’t classified as a “tax” under income tax laws. There wasn’t much credibility for income earners in their home countries.
Thankfully, the Organisation for Economic Co-operation and Development (OECD) minimum tax agreement comes to the rescue. This agreement will help coordinate the taxing of multinational companies in jurisdictions where they have customers, even if they’re not permanently based there. The decision to scrap the levy is a good sign since the government wants small businesses to adopt technology and further digitisation.
COUNTERVIEW: A risky decision
A few years ago, India defended the equalisation levy. The argument was simple – e-commerce companies in India pay taxes, but remotely located foreign companies that generate high revenue from the Indian market, don’t. That put domestic companies at a disadvantage. The threshold was ₹2 crore and applied equally to all foreign e-commerce companies operated in India. It didn’t discriminate against US companies. The principle was that companies can conduct operations anywhere in the world without a physical presence, and governments have a right to tax these transactions.
If the OECD minimum tax agreement is implemented, then that’s a step forward. However, the OECD’s pillar 1, designed to allocate taxing rights to countries where companies have a significant market and generate revenues, hasn’t been implemented. The ratification needed to see pillar 1 implemented has opposition, including from the US. With no unified approach, these one-off digital service taxes like the equalisation levy are the only way.
Without the levy, there could be some pitfalls for Indian companies, especially those offering services like online travel. Till now, Indian companies had an edge with global companies based in countries like Mauritius and the US providing these services since they had to pay an additional tax. That’s now gone. There’s also no domestic legislation on pillar 1. Many companies expected the government to have a law under the proposed global tax deal.
Reference Links:
- India’s digital economy to make up 1/5th of GDP by 2026: RBI – Business Today
- Why the ‘Google Tax’ in India? Here’s Everything You Need to Know – The Quint
- India scraps its version of Google Tax – Medianama
- India ditches its ‘Google Tax’ after US waved a big stick – The Register
- India’s ‘Google Tax’ Is Dead—But Will It Stay Dead? – Forbes
- Tax experts welcome scrapping 2% equalisation levy on foreign digital service providers – The Economic Times
- India to defend Equalisation Levy as a level-playing tax – Hindustan Times
What is your opinion on this?
(Only subscribers can participate in polls)
a) Scrapping the “Google Tax” is a good idea.
b) Scrapping the “Google Tax” is a bad idea.
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