The Cyber Tax Conundrum

Context: Digital Service Tax (DST) could be an interim solution till outside tax treaties are finalized on taxing digital services.

 Arguments that favour taxing digital services:

• Absence of sound international tax law: Base Erosion and Profit Shifting programme of Organisation for Economic Co-operation and Development (OECD) is still a work in progress.
• Symptom of Changing international economic order: Countries which provide large markets for digital corporations have the right to tax incomes.
• It is a good interim alternative: till tax treaties are finalized.
• Helps to check tax evasion.

Effort in India to tax digital services

• Implementation of equalization levy in 2016: Any payment made by non-residents in connection with an Indian user will now attract a 2 % levy. (In March 2020, expanded to e-commerce sector also)
  • Any company that has a permanent residence in India is excluded as it is already subject to tax in India. (and has no retrospective element).

Arguments against taxing digital services

• Contrary to the ethos of international agreements.: In June 2020, The US initiated US Trade Representative (USTR) investigations under section 301 of the Trade Act 1974 against India to find out if the DST is discriminatory.
  • The Equalisation Levy was found unreasonable for its sudden implementation and discrimination (72% of firms are from the US)
  • It poses a threat of retaliatory tariffs. (due to the fear of it becoming a norm)
• Present taxation is based on the notion of a fixed place of business.

Way forward: for effectively taxing digital services

• Change the Basis of digital tax: Instead of the notion of fixed place of business, Basis to tax should be the number of users in a country: European Union and India advocate this method.
  • This approach requires bilateral renegotiation of tax treaties that supersede domestic tax laws.
• Create political consensus on multiple issues: including setting up of an alternative dispute resolution process comparable to arbitration.