TAX SERIES: CHAPTER 1: TAX CHALLENGES ARISING IN INDIAN DIGITAL ECONOMY WITH RESPECT TO ECONOMIC ACTIVITIES BY CROSS-BORDER MULTINATIONAL COMPANIES.
ABSTRACT
International Tax regime have been considered to be the most important aspect of economic activities for an economy. After many years of development in technology and trade, India is likely to be the most digitalised economy in the world. India is attracting companies from all over the world. This transformation calls for a question whether international tax rules which have been formulated for more than 50 years, still fit to fulfil the purpose in the modern global economy. Digital economy has been a challenge to many laws and public policies. International tax treaties were tampered and often stood silent many times. This study not only aim to provide a doctrinal analysis of the challenges faced in India as a digital economy but furthermore give detailed information about what Action plans India have chosen from the report of The Organisation for Economic Co-operation and Development. This study unravels about how India is growing as a digital country and, most importantly losing its tax revenue due to gap between the domestic and international rules. Tax revenue is essential for each economy. Both international taxation law and Indian taxation law regimes have been forced to widen the scope with mere transparency. I here intend to demonstrate an inefficiency of traditional tax rules in India and how it is managing to secure every fair bit of its tax revenue in international regime. As, it concerns cross-border perspective, it is vital that government focuses on in its international treaties as well.
For better understanding I have fragmented my research into chapters listed below.
Chapter 1: Introduction
Chapter 2: Detailed information about India as a digitalised economy. Being a developing country how it has been in a situation of a digitalised era. How e-commerce is booming in this time.
Chapter 3: Tax challenges that India faced / is facing with digitalised companies. How tax levied to MNCs. How tax avoidance is manipulated as tax planning. Resulting in less tax revenue by MNCs.
Chapter 4: Actions taken by the government to ensure proper taxing. Formulation of policies with domestic law to expand the ambit of taxation laws in its jurisdiction.
Chapter 5: Discussion and conclusion
CHAPTER 1 INTRODUCTION
BACKGROUND
In 1991, Liberalisation, globalisation and Privatisation were the new reforms of economic policies in India introduced in order to encourage economic growth. This policy opened the door of the India Economy for the international exposure for the first time. These reforms intended to bring in larger cooperation of the private sector in order to grow Indian economy. Policy changes were proposed with regard to technology up-gradation, industrial licensing, removal of restrictions on the private sector, foreign investments and foreign trade. Gradually, people needed to expand their trade and business and hence required an improvement in information and communication technology (ICT) as per the need to connect with international trade which perhaps led to digital economy resulting in creation of online business models including electronic commerce as a part of the revolution. The pace at which globalisation has increased in recent years has promoted trade and foreign direct investment in countries. India is soon to be a digitally advanced country as it has 560 million subscribers to internet in 2018. The internet or web economy is also known as digital economy.
Evolution of networks transformed the whole notion of conducting businesses. Internet has been considered as a virtual network between two or more people. Whereas it is also use for commercial purpose (selling and buying of products online) known as e-commerce by forming websites for selling goods or for presentation. As the author has observed that the Multinational Enterprises – MNEs, tends to avoid paying tax by elaborating an efficient tax plan, seeking advantage of gaps and loopholes in domestic and international tax legislation to artificially reduce income or by transfer pricing from high tax rate jurisdiction to low. Therefore, challenging the effectiveness of traditional rules and enforcement of administration. Tax challenges arising due to digitalised business demanded international tax related policy challenges. Many producers have considered a digitalised that is online way of conducting a business as it does not include any intermediary to perform or deliver any service. India is among the top ten countries to have the e-commerce as positive contribution to its GDP.
This business model has become famous in India and has remarkably increased in the past years. The trend of using internet on daily purpose has provided ease and convenience not only to customers but for commercial transactions. In 2016, as reported 70 per cent of exports were delivered digitally. Therefore, it is been noted that digital economy grew two and half a times faster than GDP in fifteen years, forcing authorities to expand its scope and amend traditional rules. During these changing circumstances, policies development and implementation must be updated to permit the environment for better functioning of tax regime in India. India is an emerging economy and is a part of G-20, an international forum formed for the future of economic growth. Based on a request from the G-20 (an international forum for international cooperation on the aspects of international economics and financial agenda. It brings advanced and emerging economies together), which is supported by international organisations like the Organisation for Economic Cooperation and Development (OECD) elaborated and launched in 2013, the Base Erosion and Profit Shifting Project. The objective of this project is to solve the gap between different taxation systems and to obstruct tax avoidance by MNEs. After a discussion, BEPS in its report suggested fifteen actions plan for international tax systems and countries. In this regard, India has taken certain steps to support its economy and for effectiveness of its taxation system in regard to save its revenue are duly and detailed discussed in this paper.
As online business has been found more suitable for consumers. With an immense growth in technology, more and more companies are providing platforms to conduct business digitally. Thus, evolving the traditional way of retailing.
Despite of taking measures like a new PE nexus rule based on a “significant economic presence” was suggested to take over taxes from resident countries. This plan was submitted in Action 1 of addressing the Tax Challenges in a digital Economy. Moreover, India has adopted many measures recommended by BEPS. Considering all the measures, India have taken steps to tax digital and e-commerce transactions including services, by imposition of equalised levy, concept of Specific Economic Presence – SEP and proposing changes in Finance Act, 2018 by introducing Finance Bill, 2020. There are major steps taken by India to ensure that different business models created in digitalisation comes under the tax net, including, the concept of withholding tax, implementation of SEP and changes in its Income Tax Act, 1961.Even though the measures have been adopted India is still losing its revenue from the tech companies.
CHALLENGES FACED BY INDIA
As an emerging country, India is facing challenges in updating its rules for taxing foreign companies doing business digitally. One of principles of International taxation states that in any cross-border transactions when a resident of one country earns income from any economic activity in another country both home country (the home state based on residence rule) and host country (the host state based on the source rule of taxation) have a right to tax the same income. Therefore, digital economy has brought certain imbalances in traditional rules of taxing source and resident countries. One of the challenges faced is whether the traditional laws of India are sufficient enough to preserve tax rights of companies conducting their business digitally. International Tax Treaties play a major role in transactions between countries. Article 5 of double taxation avoidance agreements does not allow source countries to have a right to tax a foreign company’s profits unless they have a permanent establishment (PE). Resulting in different perspectives on establishment of PE in a market country to tax companies.
SOLUTION
Different rules and policies have been formulated and released by the governments across the globe aiming to protect their tax revenue with regards to the abusive tax plan used by several tech companies. Amongst all the measures taken by Indian government, the decision of introducing equalisation levy is embarked to be advantageous. Considering the fact that Google was not paying taxes since it has been used but because of this levy India is able to collect Rs. 4000 cores (0.6 Billion USD Dollars) tax revenue from Google since 2016 until 2019. With more platforms evolved, now equalisation levy has been amended on e-commerce operators as well. This concept has embarked successfully to remove one of the challenges of digital economy. The establishment of new Permanent Establishment nexus rule known as Significant Economic Presence along with agency PE rule have surely taken many company activities under its tax net. Digital services have also been in an account to constitute PE. Recently few provisions have been added in Income tax Act after the two losses of international tax dispute. Thus, resulting in enormous amount of compensation to the companies.
CRITIQUE TO THE SOLUTION
Tax treaties were made long time back and were signed between India and other countries to avoid double taxation a reason to keep in mind that India will not be able to take many measures as its international transactions are governed by bilateral or multilateral treaties. India’s right to levy taxes on international companies is accordance with the tax treaty between India and foreign countries. Treaties and Income Tax Act 1961 goes parallel to each other. Certain changes have to be done for synchronisation of both treaties and National Laws. Some are Equalisation levy and the change in purview of Income tax, 1961. It was a matter of fact and concern when the Indian authorities have to amend its sections with a retrospective effect for fulfilling the purpose of charging tax payable to Vodafone International India Holdings in India. After the decision of Permanent Court of Arbitration on 25th September 2020, India has amended its some sections in Income Tax 1961. The Permanent Court of Arbitration also ruled about the conduct of India’s tax department that it is in breach of “fair and equitable” treatment. India retrospective laws were introduced when Supreme Court of India gave its decision in favour of the company. Therefore, I strongly believe that Indian laws are formulating by time to time. Its loopholes are folding with cases coming forward and a lot of hard work too save its tax revenue. Instead, it is paying more as a compensation to companies.
I state that based on what was described above, it could be accepted that Equalisation Levy and amendments in Income Tax Act are the solutions which will solve the problem and thus more measures are needed to be introduced in order to have a transparent legislation. Digital Companies should be taxed where the income has been sourced. In other words, taxed in a respective jurisdiction where an economic activity is being held. India, being an emerging country faced challenges arising out as a digital economy which led to amendments in its statutes and system.
The present comparative analysis shall be analysed in company with the following questions: (i)To what extent is India losing revenue as a consequence of ineffectiveness and traditional legislation in regard to income, transactions and services of tech companies in an era when digital economy is booming.
(ii) To what extent the adoption of OECD action plans by the India Government can be effective and suitable to protect India’s tax revenue;
(iii) if and to what extent the adoption of Equalisation Levy and the amendments to the Income Tax Act xxx can effectively protect India’s revenue as a solution against the abusive tax avoidance performed by the so-called tech companies;
(iv) if and to what extent the adoption of current concept of Permanent Establishment – PE can effectively protect India’s revenue as a solution against the abusive tax avoidance performed by the so-called tech companies;
(v) to what extent can international tax treaties work smoothly for a longer run in parallel with Equalisation Levy and amendments to Income Tax Act .
– Contributed by: Ujjwala Gupta, Senior Legal Associate, Suo Law
