SINGAPORE: A broader digital tax that India announced in its national budget in February and rolled out in April has created fresh challenges as it works towards a limited bilateral trade deal with the US before the impending US Presidential elections.

The tax is also likely to have implications for future US tech investments in India. 

India began taxing online advertisement revenues earned by foreign businesses from 2016 through an “equalisation levy”. 

Proposed as withholding tax at the rate of 6 per cent, it was imposed on online advertisement revenues by foreign e-commerce firms obtained from Indian sources. 

The tax was applied on revenues exceeding 100,000 rupees (US$1335) in a year on business-to-business (B2B) transactions.

The tax was essentially on payments made by Indian businesses to foreign e-commerce platforms for advertising their products and services. 

The tax is being collected through a withholding mechanism, which implies Indian businesses withholding or retaining 6 per cent of their payments, if these exceed the threshold of 100,000 rupees, as taxes to be paid to Indian authorities.

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Several start-ups and local firms, advertising on Google and other digital platforms, have been unhappy about the burden, as a result.

INDIA’S NEW TAX

The tax is described as an “equalisation levy”, underscoring its intention to create a level playing field between domestic and foreign e-commerce service providers.

The 2016 national budget clarified the tax to be on non-residents without “permanent establishment” in India. This was also India’s effort to overcome the current insufficiency in global tax governance in taxing earnings by offshore businesses.

Since Apr 1, apart from the equalisation levy of 6 per cent, India has imposed a tax of another 2 per cent on all online sales of goods and services by foreign e-commerce operators, as well as those facilitated by them through online platforms.

The current measure brings a very wide range of e-commerce transactions within the ambit of the tax.

Revenues from the sale of advertisements targeting Indian consumers, data collected from Indian consumers and from sale of goods and services using such data, including from those accessing advertisements through internet protocol (IP) addresses located in India, are now being taxed.

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The thrust of the tax remains on foreign e-commerce businesses.

This is evident from domestic e-commerce entities with permanent establishments in India being exempted. Furthermore, the additional 2 per cent tax is on foreign e-commerce businesses with annual turnovers of more than 20 million rupees (US$267,000). 

INDIA ISN’T ALONE

Several countries are taxing online advertisement revenues earned remotely by large e-commerce businesses.

Popularly christened the “Google Tax”, these taxes are expanding in scope to include revenues from most digital sales of goods and services by foreign firms. 

The taxes are being imposed notwithstanding the Organisation for Economic Co-operation and Development (OECD) working with several countries in determining global rules for their imposition.

The taxes have led to tensions between imposing countries and the US. The US has launched investigations against a group of countries to determine if the taxes are discriminatory to US technology firms.

The countries being investigated include India and Indonesia from Asia, as well as Austria, Brazil, the Czech Republic, the European Union, Italy, Spain, Turkey and the United Kingdom. 

Taxes on earnings from the e-commerce sales of goods and services, provided remotely, are new complexities in global tax governance.

Countries tax foreign businesses on the basis of “permanent establishment” in different locations. Global firms are taxed by national governments if they have significant physical presence within national territories. 

They are also taxed on profits repatriated to home countries. The scope of such double taxation is often minimised through bilateral tax treaties.

Online e-commerce sales, by global giants like Amazon, Alibaba, Walmart, Shopify or eBay, to consumers across the world, and revenues earned from such sales, can’t be taxed by national governments through the existing principle of “permanent establishment” as their physical presence in these countries is zero or insignificant.

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Countries, nonetheless, are taxing the remotely earned revenues, which are significant, given the huge increase in global e-commerce transactions in recent years. 

The taxes are being levied on the basis of the digital presence of e-commerce companies in different countries.

THE INDIA-US ASPECT

In India’s case, in response to the tax, the US Trade Representative’s (USTR) office had started a probe against India accusing it of targeting American tech companies like Facebook, Google and Amazon.

Media reports reveal that India recently responded to the investigation by confirming that the tax was not targeted at a particular country nor its companies and that the decision will therefore not be reversed. 

The US tech industry has been distinctly unhappy with India and some other countries unilaterally imposing taxes on their digital sales from other locations, notwithstanding ongoing work on fixing a global framework for such taxes.

The latter are seen to adversely affect business interests of major American tech firms such as Google, Facebook, Netflix and Amazon. 

The USTR’s investigations on India and other countries is focusing on the impact on US tech firms, including whether they are penalising successful firms, and whether their extra-territorial nature deviates from prevalent practices of international tax systems.

The results of the investigation might lead to the imposition of trade tariffs by the US on India, as it had threatened France with a 25 per cent import tariffs on a list of goods including handbags, cheese and wines.. 

More tariffs would mean the beginning of a fresh round of tit-for-tat trade actions between India and the US.

The prospects of finalising a bilateral trade deal would thus become even more difficult. 

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India’s equalisation levy also has implications for future US tech investments in India.

There might be a tendency on the part of these investors to obtain a more local presence to qualify for the criteria of “permanent establishment” of avoiding the tax. 

This might be necessary as the current bilateral tax treaty doesn’t include this equalisation levy and thus US businesses face the prospect of double taxation.

THE LONG-TERM VIEW

India’s “Google Tax” has been expanded at a time when it is trying to protect the interests of domestic tech firms in an aggressive fashion. This is evident from the specific targeting of foreign e-commerce businesses by the tax.

India is certainly not the only country trying to tax revenues earned by foreign e-commerce providers.

It is noteworthy that India announced the equalisation levy in 2016 soon after the announcement of its “Make in India” initiative for making India a global industrial hub.

By taxing foreign ecommerce businesses, while exempting domestic ones, the “Google Tax” resonates with India’s strong pitch for a self-reliant India that emphasises reducing dependence on imports, as well as foreign suppliers of digital services.

Such priorities, along with security concerns, have already resulted in India regulating Chinese content in the domestic digital space by blocking several prominent Chinese apps like TikTok.

Whether the priorities would also lead to other foreign investments, particularly from the US, localising in India remains to be seen.

Dr Amitendu Palit is a Senior Research Fellow and Research Lead (Trade and Economic Policy) at the Institute of South Asian Studies (ISAS), an autonomous research institute at the National University of Singapore (NUS).