Alike a corporate tax, a digital tax is a tax levied on companies that do not have a taxable presence in India but generate huge revenues and profits from India through their digital presence and business model. There is no internationally recognized system to tax major global giants yet, which has been providing these companies an easy escape. They divert their profits to countries where tax rates are low (tax heavens) and avoid taxes. It’s a relatively new and temporary model until all countries come upon a major consensus in this regard.
Digital Service Tax
India is among the first countries which imposed digital service tax (DST) over such businesses. It introduced the ‘Equalization Levy’ back in 2016. It is called equalization because it aims to bring online businesses at par with brick and mortar models in terms of tax implications. An equalization levy is a tax imposed on foreign digital companies under which a 6% tax on gross revenue from their advertisement services was charged. Charging tax on revenue instead of profits helps in preventing tax avoidance.
Equalization levy has been present till April 1, 2020, when govt in its annual budget broadened its scope made by an amendment to the Act; introduced ‘Significant Economic Presence’ under which 2% tax on gross revenues will be levied on company transaction which:
- Is targeted towards a person registered in India or whose IP address would be found in India.
- Sale of data collected from a person residing in India or whose IP address would be found in India and,
- Sale of goods/services using data collected from a person residing in India or whose IP address would be found in India.
This is in line with the Organization for Economic Cooperation and Development (OECD) BEPS Action 1 report from 2015, to bring digital giants within the jurisdiction of local tax regulations. The move is expected to largely impact the huge businesses of Amazon, Google, Facebook, Microsoft, and Apple and is expected to generate huge sums of revenues for the government.
The Aftermath
The US recently launched a probe on 17 countries including India claiming a discriminatory move against US-based companies. Section 301 of Trade Act of 1974 gives it the power to investigate the matters which it believes hampers the countries’ businesses. However, India denied that the law is biased towards any specific company or country. The case is still under investigation but the move is positive and crucial as it comes during the times when the economy has been bleeding because of lockdown measures and the world is headed towards a digital economy.
Article Sumission by Kinshul Singhal
Acharya Narendra Dev College
B.Com (Honours)