TAX SERIES: CHAPTER 4: STEPS TAKEN BY INDIAN GOVERNMENT TO SECURE ITS TAX REVENUE.

INTRODUCTION

As digital economy is booming with new and innovative business models. India like any other economies is facing numerous challenges to administer and propagate economic activities digitally. Traditional tax laws are difficult to apply on economic activities generated by internet thus making traditional laws of India incapable and stand ineffective in terms of taxing e-commerce business model as discussed in previous Article/chapter. In order to have the fair tax share India took steps, amended sections under many statutes and introduced various taxes to garb international companies under its tax net. One of the perspectives to keep in mind is to maintain neutrality between traditional commercial activities and e-commerce. It was observed that tax reforms were necessary and countries are taking steps to tax digital profits. As discussed in previous chapter about the challenges in enforcement of tax law on digital profits by the virtue of digital services or intellectual property. Perhaps, new concepts are needed to be formulated and addressed and to make simpler rules to determine whether information can be defined from legal, economic and technical aspect to be acknowledged as an “asset” and is liable to pay tax. Emergence of new tax regime must be admitted by both domestic and international law and should be made within the ambit of existing taxation laws. It is to be noted that, construction of any taxation law should not contradict any other branches of law. It goes without saying that until the time new international regime has been formulated, e-commerce and administration have to face up to the challenges in current regime. Like other countries, India too has announced its plans to incorporate “virtual economic presence” into its corporate income tax system in 2019. Whatever taxation authority amends they needed to share it with international forums and institutions to have conflict free e-commerce environment.

MEASURES ADOPTED AT A MULTILATERAL LEVEL

• First and the foremost approach to solve these aspects of e-commerce was the Ottawa conference on e-commerce (1988) initiated by OECD.  This conference had deep and detailed discussions on new and innovative way of conducting a business and to find methods to deal with initial issues. OECD and 130 nations tried to have a unified approach for the digital economy. One was to establish global minimum tax but tech companies arises complexity far much the government thought so. Second step was to develop a model specifically for e-commerce transactions. And this was published in 2000 when OECD further put a clarification in commentary to Article 5 of the OECDS Model Convention with regard to taxes on Income and Capital.
• In 2001, OECD published a detailed paper on the aspect of existing principles like double tax treaties for taxation of business profits arising from e-commerce.
• Launched in 2013, OECD /G-20 led Base Erosion Profit Shifting (BEPS Project) which aims to tax economic profits of MNCs where it has been generated by performing economic activities. In 2015. OECD introduced its Action Plan on BEPS. India adopted few action plans and amend their domestic laws in virtue to international regime in accordance to function smoothly. Nevertheless, some plans are considered to be short failures in India.

UNILATERAL MEASURES ADOPTED

The various measures that have been adopted unilaterally partly take up options that the BEPS project had discussed without reaching agreement for its final report (OECD, 2015c). They mainly concern the following five categories (1) virtual physical establishment measures; (2) equalization levies on Internet advertising and digital services taxes; (3) withholding taxes on certain digital transactions, such as advertising; (4) diverted profit taxes; and (5) VAT/GST type indirect taxes, based on the geographical location of the consumer market.

1. SIGNIFICANT ECONOMIC PRESENCE:

India’s right to tax profits of non-resident companies is governed in accordance with their respective country’s tax treaty. To summarise from the previous chapter, India could tax a non-resident only if it has a permanent establishment or any physical presence within the territories of India. However, digital services and profits needed to tax. In 2018, to face this challenge India strengthened section 9(1)(i) of Income tax Act, 1961 by explaining “business connection”. Although in some case, courts could themselves examine the existence of PE (Permanent Establishments) without examining the test under section 9 of IT Act.  Indian Finance Minister proposed changes to amend the definition of business connection and did changes according to the multilateral instrument to implement tax treaties. Non-resident companies usually operate through agents and thus authorities wanted to widen the scope and leave no chance to loosen its revenue. This means that any business activity run by a person who acting or behalf of a non-resident will be charged under Income Tax Act which is liable to pay tax.

• BASED EROSION AND PROFIT SHIFTING:

OECD mentioned items 8-10 in its Action Plan on Base Erosion and Profit Shifting (BEPS) which were specifically on “Intangibles” (Action 8), “Risks and Capital” (Action 9) and “Other High-Risk Transaction” (Action 10).  Furthermore, OECD has submitted guidance in the area of “intangibles” as per the requirements in digital economy. The main element of extensive work on transfer prices is regarding intangibles and risk allocation. The focus on “real activity” and “value creation” is as a modified approach of arm’s length principle.

Perhaps the most important problem remain undressed by the BEPS Project was tax competition except the cases that fall as “aggressive tax planning” in Action 5 of BEPS. Before mentioning anything else, tax competition is defined as a process used by economies to lower down the corporate tax in order to attract investments and multinational Companies. It has been observed by the policy makers that revenue lost due to tax competition could be five times than the tax motivated IFFs. There is an indirect relationship between tax competition and tax avoidance and having a market dimension in mind, tightening rules of tax avoidance may lead to intense tax competition. In other words, countries may lower down their tax to attract companies which can hereby lead to a race of declining corporate tax.

Another concern after BEPS Project is the remaining scope for profit shifting activities. International Monetary Fund (IMF) observes that profit shifting opportunities still rise not in terms of intangible transactions. Due to increase in digital economy, these kind of problems in business model will definitely increase. 

• EQUALISATION LEVY

It is one of the unilateral measures introduced by India after the 15-Action Plans was reported in October 2015 by OECD in order to tax digital economy. An equalisation levy (EL) is a tax that India started charging on digital advertising. In June 2016, initially India started with “google tax”.  This google tax is levied on revenue earned by advertisement by foreign tech companies like Google, Facebook and Netflix in India. Reason behind this was as digital advertising comes under digital services provided by the company. Taxing intangibles have always been a problem for the authorities to tax and thereto enforce taxation laws on them. Moreover, when e-commerce boomed in India, digital marketing still considered to be play an important role in terms of investment as well as for marketing purpose. Small businesses use Facebook and Instagram for advertising purpose. This is the reason behind levy has been imposed. Because of no physical presence in India these tech companies do not pay relevant amount of tax in India. Although EL was introduced in Finance Act,2016 and initially 6% is to be levied on non-resident business under section 165 of Income tax Act,1961. Action 1 of Addressing the Tax Challenges of the digital Economy of OECD’s BEPS Project considered this tax to equalize positions of local and foreign suppliers of goods and services. The report mentioned to imposed this levy domestically and not as an international standard keeping in mind the existence of treaty obligations between India and other countries. Or else, they advised to include EL into bilateral tax treaties.

It is been a while Indian government was thinking to propose some changes in equalisation levy. The Union Budget of India 2020 amendment expanded the scope of EL to cover revenue received by non-resident e-commerce operators. The amount has shelved to 2% as per section 165A of Income Tax Act,1961. This section has been defined thoroughly widening the scope and therefore expected to have a huge impact on MNCs irrespective of the structure of their business model. Earlier, 6% was on consideration received for online advertisements and related service whereas the extended scope is 2% on consideration received by non- resident e-commerce operator (E-com EL). Problem with 6% equalisation levy was that it was applied on advertisement and the whole burden eventually falls on the local businesses or start-ups using these platforms for their services. Provided that government did cost analysis and start charging e-commerce operators from 1^st April 2020. “E-commerce operator” has been defined as a platform owned, controlled and operated digitally for sale of goods and services online by a non -resident. The whole notion devised for MNCs to pay their share of tax.

• WITHHOLDING TAX:

Withholding tax is a tax levied on payments arising from within tax jurisdiction on digital transactions. Such tax can be applied at concessional rate. It is comparatively an easier solution of addressing tax challenges in a digital economy. Simultaneously it can also apply with the new nexus PE rule- significant economic presence. To widen the scope of the base, the tax has been proposed to be put on the sale of goods and services facilitated by e-commerce platforms. Somehow, the e-commerce platforms do not have a pan number of India, instead of 1% it will be levied by 5%.

• GOODS AND SERVICES ACT:

In the area of indirect taxation, new challenges arose in respect to the collection of value added tax/ goods and services tax on the goods and services that are bought online by consumers from foreign companies. India has many indirect taxes which led to different guidelines by central and state.

To address this concern, Modi ji addressed this concern by introduction of one tax replacing all indirect taxes. The awaited indirect tax regime was introduced in India. It replaced other many indirect tax regimes. One for all. It is a consumption tax on goods and services collected by the centre and state.  There is a range from 0-28% of slab and it is according to the nature of goods. Despite considerable hindrances, GST managed its way in Indian taxation system. The significant step towards economy’s growth of dual GST comprising of central and state GST will be able to uphold the federalism spirit. This regime was introduced in keeping the mind that cross-border transactions would rise in near future and to simplify the system. Ultimately India do not lose any revenue.

There are also steps taken to remove tax evasion and eident the scope of tax base. Important tool is to prevent tax evasion are TDS (Tax deductible at Source) and TCS (Tax Collected at Source). Indian government in its Finance Bill, 2020 has increased the scope of TDS on digital taxation by introducing of TDS on e-commerce operators. It is to come effective from 01.03.2021. This step is taken to eradicate tax evasion and to bring e-commerce operators under the tax net. As mentioned, e-commerce operators have to fulfil all obligations under the provisions of TDS and TCS as well (Section 51 and 52).

CONCLUSION

India has done its best to tax digital platforms and business in order to strengthen its regime and economy. Recognising the various caveats as mentioned above, these unilateral measures could be more advantageous for a longer term. Since, digitalised economy exposes the weakness and deficiency in a fundamental structure of existing rules.  Attainment of OECD guidelines is not possible without taking due account of developing countries interests, as well as the infrastructure of their tax administrations to effectively implement revised tax laws and norms.  To mention that MNCs are still using loopholes in the legislation to avoid paying tax. To levy taxes, SEP is important. Until now, Google is only paying equalisation levy. So, they are more to bring effectiveness in laws.

After undertaking a detailed study of the multi-models evolving in the digital economy and the subsequent issues raised with respect to taxation, the problem that persists is the identification of the basis of taxation and profit sharing. A consensus in the international community is what is required to provide a sustaining solution. However, the rapid rate at which the digital economy is growing and the expansion of the internet base among masses are the two factors which make it abundantly clear that the issue cannot be ignored for too long.

Written by: Ujjwala Gupta, Senior Legal Counsel, SUO