The Other, Global Digital Divide

The Economic Times     9th June 2020     Save    
QEP Pocket Notes

Context: The incoherence in thinking of the different nation has presented a global digital divide in relation to taxation of the digital economy.

Global Digital Divide:

  • Paradox of digital economy: where on the one hand it has made the world seamless obviating the need for physical presence, it has also created significant rifts between nations.
  • Tussle between: the e-commerce based countries(like US) and consumer countries(EU, Asia Pacific) has been heightened due to increased data usage amidst pandemic.
  • Difficulty for taxation authorities: as these companies try to shift tax havens. 

India’s Side and Efforts: Consumer Country

  • India does not accept the traditional taxation rules: where a foreign enterprise can be taxed only in the country of residence unless it has a permanent establishment (PE) in another country.  
  • Huge market to tap on: The Indian e-commerce market is expected to grow to $200 billion by 2027, and India would like its share of taxes.
  • Recent steps:
  • Introduction of the equalisation levy on digital advertising transactions in 2016
  • Amendment to the definition of ‘business connection’ to include a ‘significant economic presence’ in 2018
  • Introduction of withholding tax on domestic e-commerce transactions
  • Expanding the scope of equalisation levy to cover non-resident e-commerce operators 
  • Similar global efforts: 
  • Recommendations of OECD committee set up to review the existing tax architecture: accepted that the physical nexus was not relevant for taxation.
  • Countries like Brazil, Australia and Britain have introduced similar tax proposals.

USA’s response: E-commerce Based Country 

  • Self-Serving view: Maintained exclusive jurisdiction in taxation of these companies.
  • Initiated investigations: against several countries, including India, with respect to the measures adopted by these countries to levy a digital tax.
  • Displayed muscle power: to opposing countries. (French government withdrew their taxing proposals after a threat of sanctions from President Trump)
  • Continued resistance : in any consensus over taxation can be expected from the US as it is not a part of OECD base erosion and profit-sharing (BEPS) proposals

Way Forward: 

  • Delineate digital from physical economy: intertwining of digital economy with the traditional one makes resource mobilization difficult.
  • Impact Assessment and Risk Identification studies: conducted by the business and private entities to explore planning opportunities and meet their obligations.
QEP Pocket Notes