The Cyber Tax Conundrum

The Indian Express     21st January 2021     Save    

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.