In recent times, the use (or misuse) of customer data has been hogging headlines. In a parallel world, not so far away, it has been in the news for another reason-taxation. Whether you read the news, buy merchandise or post reviews online, it leaves a digital footprint in the form of data. Such data is collected, and analysed by businesses (digital and otherwise), for targeted advertising. This data also helps businesses improve their offerings, and thereby generate increased revenue. In this scenario, the question being raised globally, including in India, is - who has taxing rights over such revenue.
The core principles of international taxation are based on the notion that any value creation is captured in the physical presence (known as permanent establishment) of people, factories, storefronts, etc. Businesses are taxed based on determination of the value created by their physical presence (or deemed presence in some cases) in different countries. However, the debate has now shifted to taxation of the virtual presence of producers of goods and services, as well as of their consumers and users.
The fundamental question at the heart of this debate is, 'Where is value created?'
There are differences of opinion on whether (and the extent to which) user data and participation create value. There is a view that access to a large volume of raw data or number of users does not create value. But what does create value is intense data analytics through complex algorithms. Such technology is the result of substantial effort and investment-related risk.
One of the challenges faced in introducing a tax based on user data and participation is that it requires a multilateral consensus for its implementation. The OECD recently acknowledged that there is no consensus among 100-plus countries on how to tax the digital economy.
Realising that such an international consensus will take time, India went ahead and took the lead in 2016 when it introduced an equalisation levy of six per cent on foreign enterprises providing online B2B advertising services.
Even the EU has proposed to levy a 3 per cent tax on the turnover of enterprises providing digital advertising and intermediation services in the EU. This proposal has been subject to criticism because a turnover tax, as the name implies, is levied on gross receipts, without taking into account the level of profitability.
India has also gone a step ahead and introduced the concept of a 'significant economic presence'. It proposes that foreign enterprises should be taxed in India if they breach specified thresholds of revenue or number of users in India-even if they do not have a physical presence here.
The US is opposed to any proposal that adversely affects its digital enterprises for tax purposes. Therefore, any move made by India to levy taxes on US companies, based on their significant economic presence in India, will undermine India's bilaterally agreed treaty with the US.
Evolution of a global consensus is critical for ensuring that innovation and growth are not suppressed. Pending this, the global race (read war) to levy tax on data and digital footprints will continue, and such turnover taxes will only harm newer entrants and overall create an unlevel playing field. Governments, including India's, must balance the need to collect taxes with that of making much-needed services and innovations more expensive for its own consumers.