Implementation of corporate tax rate in India for digital companies with multiple country presence have been tricky. Apart from the budget, there are other requirements that need to align with the global framework.
Ahead of the presentation of the Union Budget on July 5, experts said that the government will have to improve the tax compliance from companies by rethinking the Dividend Distribution Tax (DDT), and fool-proofing the mechanism that taxes digital corporations.
It was reported that India’s corporate tax rate is among the highest in the world. Corporate Tax is a direct tax imposed on the profits of corporations. And according to Vaibhav Luthra, Tax Director, EY , this tax, along with DDT imposed on dividends paid to investors, makes the effective tax rate higher than most of the countries, at times taking up close to 50 percent of a company’s profits.
Luthra suggested that reforms on the DDT regime, or even withholding the tax on dividends would help lighten the tax burden. A Deloitte partner suggested bringing companies under the 25% corporate tax rate.
Another challenge to tax digital companies is the 'Permanent Establishment' (PE) status, as they are able to exploit double taxation norms, and get taxed only in their home country. For example, in India, it is possible for American digital companies like Amazon and Netflix to forgo paying tax in India as they lack the ‘PE’ status, despite having a significant level of economic activity in the country.
According to a report by the Organization for Economic Cooperation and Development (OECD), Base Erosion and Project Shifting (BEPS) is also a major hindrance towards taxation.
BEPS is a way of avoiding tax by multinational corporations by strategically shifting profits from a higher to a lower tax jurisdiction or tax haven.For example, corporation X might shift profits in the form of royalties from the US (higher tax jurisdiction) to Luxembourg (lower tax jurisdiction). In this case, local businesses are at a huge disadvantage as they would have to take the tax burden alone.
Offshore e-commerce platforms have managed to exploit this loophole to pay little or no corporate taxes in many countries including the UK and US.
Taxing digital companies with a presence in multiple countries has been tricky in India as multinational corporations may enjoy an unfair advantage over local businesses due to the option to 'cherry-pick' tax havens.
To tackle this, the OECD had put out a Finance Bill in 2018, which will be applicable for tax year 2019.To tax digital corporations with little or no physical presence in India, an Equalization Levy of six percent was introduced in 2016 which is like Tax Deducted at Source (TDS)to deduct tax at source of payments made by Indian firms. It is applicable to specified Business-to-Business(B2B) services like online advertising. According to an EY report, the law currently does not offer a clear redressal mechanism when a dispute arises between the tax assessor and the payer.
The budget will need provisions which are clear, transparent and in congruence with the international standards to deal with both these challenges of reducing tax avoidance and keeping India an attractive tax jurisdiction.