A multilateral solution

Create joint norms on digital taxation with other jurisdictions

Speaking recently at a meeting of G-20 finance ministers and central bank governors, Finance Minister Nirmala Sitharaman raised the vexed issue of cross-border digital taxation, and said that a “consensus-based solution should be simple, inclusive, and based on a robust economic assessment”. The finance minister was right to bring up the problem at this venue, since the question of taxing cross-border digital services is one that the G-20 (together with the Organisation for Economic Co-operation and Development, or OECD) has sought to address for some time now. Indeed, Ms Sitharaman’s words directly echoed the work programme on digital taxation produced by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, or BEPS. India has of course introduced since April 1 a 2 per cent “equalisation tax” on non-resident e-commerce companies, which has proved to be controversial. This adds to a previous 6 per cent tax on revenue earned by non-resident companies from advertising. The government must now work harder to demonstrate that its decisions on taxing cross-border digital services are within the mainstream of policy reactions globally.

The reason for this effort is the need to repair the economic relations with the US in such a way that it aids India’s recovery from the effects of the pandemic and the pre-existing investment and demand slowdown. This particular issue should not be seen as a specific irritant in India-US relations. The US has launched a “Super 301” enquiry — an investigation under Section 301 of the 1974 US Trade Act — into digital services taxes in its trading partners, to “investigate and respond to a foreign country’s action which may be unfair or discriminatory and negatively affect US commerce”. The Indian government’s argument is that the equalisation tax is not discriminatory, in that it is levied on all non-resident e-commerce companies. However, the government must also accept that questions can legitimately be asked about whether the levy favours domestic competitors over non-resident companies. Further, the levy itself has several inconsistent facets, which needs to be addressed. For example, if particular goods from a foreign country are not subject to tax in India, then why should a digital transaction for these goods be subject to the new tax? The rules also cover all transactions with an “Indian” IP address, even if between two non-residents.

India is not the only country to seek to fairly tax the big transnational digital services companies. Eight large economies in the European Union, as well as Britain, Mexico, and Tunisia, have introduced digital services taxes of some kind, according to a recent report of KPMG. Others, such as Australia, have extended goods and services tax to imported digital services or introduced taxes targeted at multinationals. The Indian solution is far from the best of the various ones on offer. But as the BEPS project itself argues, some form of digital tax can work at best as an interim solution till international tax treaties reflect the changed digital economy. India’s commitment to multilateralism over unilateralism means that the government must seek out its counterparts with similar concerns about digital services taxes, and produce the inclusive and simple principles that can underlie these treaties. It will then have something to take to the US, as part of a coalition of concerned countries.