The advent of technology has given rise to the digital platform and e-commerce. Digital revolution has paved the way for niche businesses offering tech-based services and business solutions. The digital push has encouraged many a ‘startup’ enterprise to tap business opportunities hitherto unavailable. The ‘startups’ offer solutions through ‘apps’ in the field of education, transportation, communication, banking, to name a few.
The extensive penetration of smartphones and the availability of internet services has made technology available and accessible to all. Technology has promoted inclusive development benefitting rural India with access to market data and banking services at their fingertips.
The Government of India has formulated a ‘startup’ policy granting tax benefits and regulatory clearances to Indian startups. Many of these startups have turned into unicorns (a USD1 billion company). The startups have provided many a digital solution to business enterprises and the public in general, namely Paytm providing digital payment solution. While globally the number of unicorns has grown from 39 in 2013 to 452, India has about 31 unicorns.
Indian companies pay taxes on their global income in India. However, the situation is different for foreign companies offering digital services in India. These companies are taxable on their global income in their country of residence. However, there is an increasing global demand for making these companies to pay tax in the countries of their respective operations. The most prominent and household names are Google and Amazon.
India, too, seeks to tax a portion of the profits attributable to the business carried on in India by foreign companies. However, the international tax law grants the country of residence the exclusive right to tax business income. Thus, it results in legal tax avoidance denying the source right the tax on business activities carried therein. Tax avoidance also occurs through the claim of income-tax deductions for interest and royalty payments, and from operating from low or no-tax jurisdictions.
The Organization for Economic Cooperation and Development (OECD) seeks to put in place a framework to combat the various base erosion and profit shifting (BEPS) tools. The OECD has under its BEPS project issued 15 action points to address various tax planning strategies employed by multinational enterprises (MNEs). BEPS would apply to both the digital business as well as the regular business activities carried on by MNEs.
A question arises whether is it fair that the MNEs do not pay tax in the countries where they carry on business and generate value. While there are a set of countries who believe BEPS is a proposal for fair tax, others do not believe BEPS is a fair practice. The other countries are adopting unilateral measures to tax digital business transactions. Countries have imposed a tax on the sale of digital advertising space, subscription to digital content, sale of goods on e-commerce platforms and rental platforms.
Unilateral measures would harm the intention of the BEPS project. The measures would result in double taxation of the same transaction, increase tax costs and harm trade relations. Instead of promoting tax sharing in a harmonised way, unilateral measures would defeat the purpose of the BEPS project. However, the OECD has recently released a proposal for having a ‘unified approach’ for taxation of the digital economy and reaching a consensus by the end of 2020.
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I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.