The latest decision by the G7 economies to back a proposal to create a common global corporate tax structure for multinationals have pit New Delhi and Washington DC even more against each other on India’s contentious digital tax, popularly known as Google Tax.
The tax proposal endorsed by the US, the UK, France and other G7 countries on May 5 states that countries around the world should tax their home companies' overseas profits at a rate of at least 15 percent. This 15 percent of global minimum corporate tax would deter multinational corporations from shifting their businesses and profits to select tax havens.
But the main contention is over another provision in the G7 proposal, which states that countries would have to revoke their respective digital services taxes after the global corporate tax goes into effect.
Officially known as the ‘equalisation levy’, India charges all non-resident entities up to 2 percent on their earnings through digital businesses based in or targeting the Indian market, covering most American internet majors.
Rising tensions
The United States Trade Representatives (USTR) office had held a hearing in May over whether retaliatory tariffs should be imposed on India. India had expected a breakthrough on the issue after the USTR had deferred action by six months. But it now appears that the US government was, in fact, waiting for more consensus on the G7 tax proposal, a senior official said.
“The proposal, in its core, is not acceptable since India will not support a system under which international rules will dictate the right of sovereign nations to fix corporate tax rates," he said. He added that the government will officially comment on the matter as the G7 further firms up the proposal further.
The 47th G7 summit is set to take place in Cornwall, United Kingdom, on June 11–13 . The issue is expected to be discussed then.
However, the Commerce Department, which has continuously engaged with the US on a series of complicated talks regarding trade and tariffs over the past few years, has begun to firm up its response before the next meet with the Americans.
“We have earlier laid our position on the matter clear. Retaliatory tariffs are based on suitable discrimination of businesses and goods from one particular nation. We consider the US argument justifying them to be void, especially because the equalisation levy does not only cover American companies but all foreign entities," a senior Commerce Department official said.
He added that given that India's large domestic market continues to grow and citizen's engagement with digital commerce rises at an exponential clip, the government finds it necessary to tax those who are making large profits from this.
The US has repeatedly opposed any taxation on the internet, and back in January this year, called the move discriminatory because it exempts Indian companies and targets non-Indian firms. A USTR report also pointed out that a disproportionate number (86 out of a likely 119) of American companies would be liable to pay out the taxes, given that a majority of the players on the digital and technology fronts are American.
However, India may even support the proposal, given that countries where MNCs operate have been promised they will be 'awarded taxing rights on at least 20 percent of profit exceeding a 10 percent margin for the largest and most profitable multinational enterprises.'
“New Delhi will effectively have to choose between its projected earnings from digital commerce and the right to tax MNCs for the business they make in India,” a senior government advisor said.
Google Tax genesis
The Finance Act, 2020, enhanced the scope of India's digital tax levy known as the Equalization Levy (EL) to cover 'e-commerce supplies or services'. With effect from April 1, 2020, it is chargeable at the rate of 2 percent on consideration received or receivable by non-residents who operate digital businesses targeting, among others, the Indian market.
It exists as a separate levy alongside the Goods and Services Tax (GST) on cross-border transactions, and, hence, it is an incremental cost of doing business. The levy covers a range of digital transactions including business-to-business (B2B) transactions, business-to-consumer (B2C) transactions, e-commerce marketplaces and digital services.
This covers all digital transactions done in India as well as those which use Indian data if the offshore digital economy firm’s revenue from India is Rs 2 crore or more.
First brought into force in 2016, the levy had been popularly known as 'Google Tax' and had just targeted offshore firms hosting advertisements aimed at Indian consumers. But its expansion to almost every corner of the commercial domain of the internet has stoked US anger.
