Updated: June 16, 2021 8:01:46 pm
In the just concluded G7 summit in UK, the leaders endorsed the decision of the G7 finance ministers, announced on June 5, for global taxation reforms premised on two pillars – one, that the largest and most profitable 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 and 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. These would now be placed before the G20 finance ministers and central bank governors beginning July 7 this year to arrive at a consensus and move towards implementation.
For a few countries like India, which have been raising this issue of multinational tech companies paying meagre tax over the years despite their expansive operational base and income due to the huge number of consumers and their preferences, these steps might still not offer an equitable position.
While, the concept of tax on electronic transmission of data across borders was expressly prohibited under multiple WTO declarations, they failed to encapsulate the changed global scenario playing out in the digital landscape where multinational corporations were mining big data, which has economic value, from sovereign states 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. Interestingly, UK and France have now reconciled to the G7 position despite being votaries of fair digital services taxation.
However, India has stood its ground. With the largest user base for Facebook, WhatsApp and YouTube, which is monetised handsomely by these platforms, India will not be adequately compensated by the above two steps. With around 45 per cent of a total population of 1.3 billion being digitally connected, and more people getting connected, these tech companies are bound to benefit further.
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 which have been made by selling advertisements based on the data collected within the country.
The USTR investigation launched after India’s equalisation levy’s announcement in 2020 found it to be discriminatory and imposed a 25 per cent retaliatory tariff on a list of goods from India as well as five other nations thus investigated. On June 2, the US suspended the implementation of the penalty for a period of six months to allow the G7, G20 and the 38 nation Organisation of Economic Cooperation and Development (OECD) to build a consensus on the issue. 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 and had built a model around two pillars on which the G7 position has been announced.
The fact remains that consensus building will require a lot of effort and negotiations will happen on many fronts. This is where the position of India and the countries that have raised the issues of DST must be patiently heard. Indian economic diplomacy has to be fully geared to the ensuing trade negotiations so that India’s digital presence and future strength harnessed by tech companies are compensated fairly.
At the same time, 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. Till that is achieved or a consensus arrived at, the government must ensure that the DST will fill the gap as an economic rent against the use of Indian data.
The writer is a member of the editorial board of the cyber journal of Chatham House.