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What is the Google Tax in India?

Editor, TRANSFIN.
Jul 26, 2020 2:45 PM 4 min read
Editorial

Over the past two weeks, the term “Google Tax” has picked up mainstream relevance in India. There were reports that the US is investigating ten countries for imposing digital taxes. Then came the news that Washington would impose additional duties of 25% on French imports worth $1.3bn. And finally, India’s Finance Ministry’s announcement yesterday that any clarification on the Tax was not in the offing, and that scrapping it was off the table.

What is the Google Tax?

Firstly, the Google Tax is not a tax on Google - well, at least not only on Google. It came to be called that because Google was the poster boy for the practice that precipitated the levy in the first place.

For a long time, big foreign companies (tech and otherwise) such as Google, Amazon, Facebook, Apple, Starbucks etc. Managed to pay less corporate taxes in some geographies by pursuing the controversial tax-avoidance trick of diverting their profits or royalties to other, low-tax jurisdictions (aka tax havens).

 

They Reap What You Sow

For example, Google managed to pay a negligible amount of tax in the UK by completing its transactions in Ireland, which had lower levels of taxation. This happened even though the billions that were taxed were actually earned in the UK.  

Similarly, the profits garnered by Facebook in India were previously avoided because the tech giant could complete the transactions in another jurisdiction, where the tax rates were lower and to its benefit.

If you’re a country that doesn’t boast of housing major global tech giants, these antics would naturally appear discriminatory. After all, these companies are making profits off of your citizens’ usage and personal data. But the benefits are being reaped by another nation. So the frustration is not unwarranted.

 

India’s Google Tax

In 2016, the Government of India (GoI) imposed a 6% “Equalisation Levy” on payments for digital advertisement services received by non-resident companies without a permanent establishment in India (if they exceeded ₹1L ($1,340) a year). This Google Tax was expanded in the 2020 Budget by adding foriegn-based e-commerce companies under its ambit. A tax rate of 2% (plus a surcharge) is now levied on the amount of consideration received/receivable by an e-commerce operator.

The amount the GoI has collected from this Equalisation Levy since it was imposed is ₹2,600cr ($348.4m). ₹200cr ($26.8m) has been collected so far this fiscal under the revised rules (the due date for payments in the first fiscal was July 7th).

 

International Taxation Rules

The digital tax has been a contentious issue in international taxation for years now. The conundrum is this: Since a multinational company operates in several countries, which country gets to tax its income?

The prevailing notion is that companies should pay taxes in the country where they are resident. This is partly the outcome of the OECD’s Base Erosion and Profit Shifting (BEPS) norms. Under BEPS, three factors are considered key to determine which country can tax an MNC’s income:

  1. design and control of intangible assets (like intellectual property, patents, trademarks, copyrights etc.),
  2. direction of and establishing priority of intangibles, and
  3. management and control of intangibles. 

So the parameters stress on “control” and “management” a lot. Clearly, this favours the countries that are home to the world’s largest corporations. This invariably means these terms are favourable to countries that are developed and rich. (After all, this is the OECD we’re talking about.)

In particular, these rules favour the US, which is home to most Big Tech firms and some of the world’s largest MNCs. No wonder, then, that the Trump administration has responded to moves to impose such levies with heavy-handed threats to impose retaliatory measures.

 

The Global Revolt Against Big Tech

The prevailing system is the target of much criticism. Last year, India and 28 developing countries objected to the OECD’s proposals on the matter, demanding that tech companies pay their fair share in taxes in jurisdictions where they don’t have a physical presence.

As of today, more than two dozen countries have implemented or announced intentions to implement a digital tax on big tech companies. 

What is the Google Tax in India?
(Source: KPMG data)

There is an international understanding that such taxes are important and long-due. Not only to plug tax-avoidance loopholes but also to curb Big Tech.

But the thing about being the most powerful economy in the world is that you can throw your weight around rather effectively. Threats of US retaliation have fractured any global cooperative response. Instead, there have been a series of unilateral actions, which are nowhere near as effective as an international one. For example, the European Union almost imposed a 3% Google Tax in 2018 - but this was derailed after Sweden, Denmark and Ireland backed out, in part due to apprehensions about the possible US response.

 

What’s Happening Right Now?

As previously noted, the US is currently inspecting different countries’ digital taxes. This list includes India. 

While it has been indicated that this is merely a preliminary probe, India cannot risk the dispute escalating to a level where the countries are throwing tariffs at each other (as is what’s happening between the US and France). The timing is bad because:

  1. The Indian economy is at the end of its tether right now, thanks to COVID-19 and the lockdown, and
  2. Washington and New Delhi are currently discussing a comprehensive trade deal to improve economic ties.

This becomes all the more tricky considering many MNCs are seriously exploring options to set up bases beyond China and India-US alignment has become ever more pressing post-Galwan.

Paraphrasing Paul Krugman, international trade has always been more about geo-political equations than fair economics.

FIN.

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