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Last Updated : Jun 24, 2019 10:32 AM IST | Source: Moneycontrol.com

Policy | Data localisation determines taxes, sovereign rights

The RBI and commerce ministry together with tax authorities and technology experts must define the data localisation issue.

Moneycontrol Contributor @moneycontrolcom

K Yatish Rajawat

Recently, the Reserve Bank of India held a discussion with several payment companies and assured them that it will look into their concerns about data localisation. There is a massive effort to stall the law on data localisation. The RBI as well as the commerce ministry has been inundated by requests by e-commerce companies to relax the localisation rules.

These firms have been obfuscating the issue by saying that data localisation is not feasible, and even citing it as a trade barrier. Late last year Mastercard proposed it would delete data of Indian customers from global servers but warned that such a move would weaken “safety and security”. It questioned the Modi government’s push for RuPay and used the might of the US government to put pressure on India. Washington is backing Mastercard which has held talks with the RBI while Walmart, which has acquired e-commerce major Flipkart, has approached the commerce ministry. E-commerce firms are pushing the debate towards privacy of data and security — this could be because it is easier to convince the government about the importance of privacy and security in the West, and thereby swing decisions in its favour.

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On the data protection argument, e-commerce MNCs find it easier to give the impression that data is more secure in their own data centres based out of the US and Europe. Unfortunately, there are Indian companies that are distorting the debate so that it divides and confuses the policy-makers. It is hoped that RBI and commerce ministry officials do not buy this argument.

The real issue is about India having sovereign right over every facet of data generated within the country.

Transactions are crucial because they determine taxation. Taxation determines sovereignty of a nation state. Digital transactions will be the single largest source for taxation and innovation in the future. The shift to transaction base taxation has already happened due to the implementation of the Goods and Services Tax (GST).

Transactions also define and determine markets. Markets used to be geographical hubs of economic activity. A geographical location determined its tax jurisdiction, but geographical rules do not apply in the digital world. In the digital world, the location of the data determines everything. This gap in India’s laws have been misinterpreted by the international financial services companies for years. Credit and debit card-issuing companies do not pay tax on transaction income generated in India. The switches for these transactions reside in countries that are out of reach of Indian tax authorities. This has been going on for many years which is why China created an alternative sovereign infrastructure. This is also the reason that card transactions did not take off as the cost of transaction levied by these companies was always high. It is only after India created its own public digital infrastructure that digital transactions took off.

Which is why the Unified Payments Interface (UPI) is so important as an infrastructure as it reduces dependence on payment infrastructure based outside the country. Moreover, if the data for the transaction does not reside in India then it is easy for the entity to deny taxation on it. There are several non-digital transactions where jurisdiction of the transactions has been used to avoid taxes. Hence the jurisdiction of not just large transactions but even small transactions is important.

In the case of e-commerce, it is clear that almost every consumer in the future will do transaction on a platform instead of a physical store. This would effectively mean that the largest transactions in the economy may not happen physically in India if the data is not localised here. This has repercussion on the trade deficit front and also on how companies importing will be treated

The laxity of regulatory bodies and their inability to understand transactions as markets has had its problems. The Singapore Stock Exchange created derivative instruments based on Indian markets. This was nothing but data arbitrage and financial innovation, and it happened because the regulators did not ensure the localisation and ownership of data. Future financial innovation will be based on data and products will be built on it. The ownership and location data cannot be handed over to transnational corporations. This has repercussions on the banking and fin tech sector growth and ownership.

Crucial issues such as permanent establishment will be determined by data localisation. Application of every other law — on royalty payment, profit repatriation — will be dependent on the recognition of location. Location for digital firms will be determined by not registration of the company but by data.

Indian industry has been facing an onslaught from cheap Chinese suppliers using global supply chains via e-commerce. It is not possible to track these as imports as most of these transactions between the vendor and e-commerce platform happen outside the country in Singapore. This has led to the rise of Chinese e-commerce companies supplying directly into India without setting up a company, all on the basis of an app.

 Transactions worth billions of dollars have already taken place destroying jobs in small and medium sectors such as garments, manufacturing, textiles and others. The only way that the full extent of the import volume on these products can be gauged is if there is localisation and disclosure of transaction data.

Data will only be disclosed if it is localised in India. Otherwise, like social media giants who have been thumbing their noses at Indian regulators, request for data from e-commerce or other transaction platforms will also be ignored.

This is not an issue that should be addressed in isolation by the RBI or the commerce ministry. There is a need for the tax authorities and technology experts to be involved in determining India’s approach on this issue.

 K Yatish Rajawat is a policy analyst and journalist. Twitter: @yatishrajawat. Views are personal.

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First Published on Jun 24, 2019 10:32 am
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