This post has been authored by Shwetha Vincent and Anjan Kumar, Research Analyst Interns at Arthashastra Intelligence

In today’s world, physical existence of a business entity has become irrelevant to its recognition. Online businesses or E-commerce traders needs no presence to sell their goods and services. Traditional tax system levied taxes based on the income raised or received in a particular geographical boundary and the jurisdiction related to it. With the development of technology and increase in digital business transactions (i.e., purchase and sale of goods and services digitally), global tax systems face a new challenge. This challenge to the state is into an opportunity for Big Techs who exploit the systemic flaws and legal loopholes. To counter such unequal distribution of wealth, states are now looking for a new taxation model. One of such taxation models is ‘Digital Tax’.

In 2013, OECD released a report on a phenomenon known as Base Erosion Profit Shifting (BEPS). It explained how multinational firms would shift their profits from higher jurisdictions to lower ones. In 2015, OCED released a series of recommendations for setting minimum standards in national tax systems, revising international standards for the way those systems interlock, and promoting best practices, which were agreed by G20 Finance ministers. But it also advised countries to adopt such recommendations in their domestic laws as additional surety against BEPS. Acknowledging this observation from the OECD, the Indian government introduced the Equalization Levy in 2016 as an interim measure until the OECD countries can arrive at an agreement.

India was the first country to impose a digital tax with the name Equalization levy. Government taxed earnings of non-residents who provided online advertisement services to Indian resident businesses. A mere 6% was levied in this form of tax on the consideration transacted. India collected 2600 crore (approx.) from F.Y. 2016 to F.Y. 2020.  Several EU Countries like Austria, France, Italy, Spain etc. followed this path and introduced digital tax (3%) in their states. United States deemed it discriminatory against its tech giants. It retaliated against this levy by imposing imports tariffs, stringent immigration rules and guidelines etc.

Recently, in the 2020 budget, India extended the scope of tax and included consideration received by e-commerce operators crossing the prescribed threshold, for supplies to Indian residents, and non-residents in certain cases. In 2021, it further increased the scope by adding the qualification of an organization as an E- commerce operator. Moreover, it reduced the levy to 2%. The Indian government issued a statement saying it introduced this tax as part of its obligations to the Organization for Economic Cooperation and Development (OECD). This action was further subject to threat from US in the form of retaliatory tariffs.

With global digital retail e-commerce estimated to increase from $2.38 trillion in 2017 to $6.3 trillion in 2024, and an estimated 8.94% growth in average global digital commerce rate, the tech tax is here to stay. As e-commerce will change the current business environment, states should define and interpret the legislations in professional sense rather implying it in literal. Furthermore, states shall cooperatively create a global tax architecture for a neutral global understanding, which shall help in reduction of conflicts, if any. The Equalization Levy is a welcome step that serves as a stopgap to prevent loopholes in law until this global consensus is arrived at.

References:

1. ‘More trouble for tech giants, as Italy set to follow India\’s example by introducing digital tax’, Sachin Dave, Jan 11, 2021.
2. Digital Services Tax: Why the World is Watching, Bloomberg Tax, Jan 6, 2021
3. Biden reinvigorates tariff war against India with retaliation against digital tax, The Economic Times, June 07, 2021
4. Global Retail E-commerce sales worldwide, Statista
5. Average Global Digital Commerce, Statista