In the last fiscal, taxes on online advertisements by Indian companies with global digital firms like Google and Facebook brought in a windfall for the exchequer. The collection under the equalisation levy, introduced by the Modi government in 2016, shot up 59 per cent year-on-year to Rs 939 crore in the year ended March 31, a source in the know told Mint.
The 6 per cent equalisation levy is imposed on payments made by Indian businesses to a non-resident service provider offering digital advertising services that does not have any permanent establishment in India. This covers social media giants such as Google and Facebook as well as mobile phone apps and digital content streaming services. The levy is subject to the condition that annual payment made to a service provider exceeds Rs 1 lakh in a financial year.
This implies that the actual amount paid to the digital platforms was actually much higher during the last fiscal. Going by the 6 per cent tax rate, the tax collection suggests that Indian entities shelled out at least Rs 15,650 crore to place advertisements, up from the Rs 9,800 crore they spent in FY18. Taxing the profits of such offshore digital firms efficiently is not easy for the tax department as either they may not be incorporated in India or may not be recognising their entire revenue in the arm incorporated in India.
"There is a huge potential for further growth in digital economy as well as tax revenue from this sector, only a small part of which - online advertisements - is taxed under the equalisation levy at present," Girish Vanvari, founder of advisory firm Transaction Square, told the daily, adding that growth in digital economy tax proceeds "could be similar to the growth we had seen in the past in service tax proceeds". The government could also expand the scope of the levy to other services.
It is already working on making "significant economic presence" the benchmark for calculating the tax dues of the global digital firms. The move announced in the Union Budget 2018-19 is to tax businesses in terms of their customer base in India or revenue, even if they have little physical presence. A report by the Ministry of Electronics and Information Technology (MeitY) and McKinsey and Co. in February claimed that India can create up to $1 trillion of economic value from the digital economy in 2025, up from about $200 billion at present.
Finance Minister Nirmala Sitharaman had noted the urgency to fix the issue of taxing profits made by digital economy companies in her first foreign engagement after taking office - the G-20 meeting of finance ministers in Fukuoka, Japan, in June.
She was referring to the global efforts that are underway to impose a unified tax policy on Internet giants such as Google, Facebook, Amazon and Netflix, which face criticism for cutting their corporate tax bills by booking profits in low-tax countries regardless of the location of the end customer. There's no dearth of people calling such practices unfair.
The Paris-based Organisation for Economic Cooperation and Development (OECD) had estimated in 2015 that the existing setup has cost governments up to $240 billion in lost tax revenues. The figure continues to snowball. According to reports, Google alone saved $3.7 billion in taxes in 2016 by shifting money between Ireland, the Netherlands, and Bermuda. Moreover, with increasing digitalisation, the challenge now before the G-20 countries is how to tax businesses that mostly rely on intangible assets, data and user participation.
"In this respect, the FM [at Fukuoka] strongly supported the potential solution based on the concept of 'significant economic presence' of businesses taking into account the evidence of their purposeful and sustained interaction with the economy of a country," the finance ministry said in a statement at the time.
The OECD has already announced that 129 countries have signed off on a roadmap to grab a fairer tax share of multinational corporations' booming sales. India is one of them. The meeting of tax officials scheduled next month is expected to shed more light on the issue.
According to Sitharaman, a consensus-based equitable and simple global solution would be reached by 2020. The CBDT is also looking to frame income tax rules relating to 'significant economic presence' and has solicited suggestions/comments from stakeholders and the general public by September 30 on the same.
With Reuters inputs