Digital taxation: How a consensus-based approach may benefit Indian economy

 The government has taken a balanced stance by committing to the multilateral approach for addressing tax challenges of digitalization

In the past decade, India has emerged as a key voice in the international tax debate, spearheading developing countries’ source and market-based taxation rights (examples include India’s source rules for taxation of indirect transfers and expansion of withholding taxes to the fee for technical services under India’s tax treaty network). Through its participation in the G20 and OECD’s BEPS initiative, India has committed to a multilateral approach for securing a fairer, stable, and non-discriminatory international tax policy regime for developing nations. It was only natural that India recently backed OECD’s Inclusive Framework, which (amongst other things) aims to address tax challenges arising from digitalization of the economy and reallocates taxing rights for large businesses to market jurisdictions. In its Press Release of July 1, 2021, the Ministry of Finance noted that India was in favor of a consensus-based solution, which is simple to implement and allocates meaningful revenues to market jurisdictions. As India commits to walk the line, this article evaluates how a multilateral consensus-based approach to digital taxation may indeed be beneficial for the Indian economy and the need of the hour.

Admittedly, unilateral digital services tax, such as equalization levy (EL), is an imperfect tax, a makeshift arrangement at best. Notably, their validity has been questioned because of their application to revenues as against net income and inconsistency with existing international tax principles. Moreover, disjointed unilateral taxes have imposed a disproportionate burden on businesses in terms of compliance costs and double taxation. These arguments have also been the mainstay of the USTR investigations, which led to trade and tariff actions globally. According to OECD, the absence of a consensus-based solution could lead to a proliferation of unilateral digital services taxes and an increase in damaging tax and trade disputes, which would undermine tax certainty and investment. The failure to reach an agreement could reduce global GDP by more than 1 per cent annually. The hope is that once a multilateral solution is reached through the Inclusive Framework, unilateral taxes will be withdrawn preventing the threat to international trade and commerce. As Rashmi Ranjan Das, joint secretary, CBDT, recently noted in an interview “We are part of the inclusive framework where there is a general agreement that once there is a consensus, all such unilateral measures will be withdrawn,” Indeed, India’s support to multilateral solution and success of global tax agreement will lay a strong foundation for its trade negotiations. A senior official from the Ministry of Commerce was also recently reported to have said that the success of global tax discussions will pave the way for the India-US trade negotiations. Moreover, once a global consensus is reached, any outlier nation is bound to feel the heat of trade and tariff disputes amidst allegations of breach of international tax principles and trade law.