India Digital Tax - An Overview

With the second-largest online base of users in the world and over 500 million active internet users, India is literally sitting on a mine of high revenue potential. Digital businesses are booming and have seen an uptick in their growth from online sales, now more than ever because of the digital India initiative and most recently because of the lockdown.

Until recently companies having a digital presence in India but not based out of here physically, were not included under the taxation framework. The latest amendments in the Digital Taxation framework, however, bring these multinational online businesses under the ambit of local tax laws. This implies that most of the tax laws that were formed before the digital revolution and were applied to brick & mortar establishments under the international taxation regime will not also be applicable to international e-commerce and digital business firms.

Why was this necessary? When it comes to formulating international tax policies, it becomes imperative to ensure that there is global consensus to implement fair rules and regulations avoiding any case of double taxation. The OECD or the Organization for Economic Co-operation & Development had been tasked with building a global consensus and had brought certain issues to light back in 2015 through the BEPS (Base Erosion & Profit Shifting) report which led to BEPS Action 1 Report. While the report emphasized the need for global consensus, it failed to provide any actionable recommendations.

However, certain measures were taken by the Government of India and in 2016, an ‘Equalization levy’ of 6% was implemented on sales of digital advertising. On a global scale, however, a lack of a consensus led to unilateral measures being imposed to equalize the burden on foreign and domestic suppliers/businesses. The proliferation of these unilateral levies in addition to ongoing international negotiations helped build a broad consensus. Earlier this year it was decided that there will be taxes imposed on their digital ecosystem. However, the last couple of months have seen a lot of debate around this decision leading to geopolitical ramifications and has led to de-establishing the consensus. Additionally, the pandemic has forced a massive change in consumer behaviour leading to a boost in digital transactions and purchases. An accelerated surge in online businesses has left governments anxious and desperate as it presents a huge revenue potential for the economy and an opportunity for them to impose additional tax on these businesses.

India’s recent taxation policies reflect a 2% levy on online sales for e-commerce companies that are not based out of here but run operations here in addition to the levy of 6% on online advertising & marketing. Imposition of this tax affects these businesses as they are bound to pay tax in their home country as well as the country they operate in. Most of these companies are U.S based and the U.S government has launched an investigation in relation to these levies imposed by several countries including India in addition to backing out of several international negotiations.

The U.S Trade Representative has also suggested a pause in the OECD talks and focus on handling the current global pandemic that’s engulfed the world. India needs to  ensure that these levies are not discriminatory in nature and are implemented across the board once all the stakeholders are on board with the decision and at the global level, OECD’s multilateral approach should refocus efforts towards formulating an equitable framework that imposes a moral obligation on countries against unilateral measures while granting them a certain degree of flexibility to address the tax challenges of digitization.

For now, India has gone ahead and levied the digital tax and its first collections were due last month in July. These collections have been lower than expected and this is mainly because several e-commerce giants have asked for an extension mainly due to the pandemic. However, the Indian government is not in the mood to provide any extensions and claim that e-commerce giants have had enough time. India has also taken a stand and brushed off the State’s claims that only American companies have been targeted under the equalisation levy.