GAFA tax is a proposed digital tax to be levied on big tech companies like Google, Facebook, Amazon and Microsoft. France has introduced GAFA tax at 3% on revenues from digital activities.
OECD is overseeing a deal to negotiate global digital tax by the year 2024 which will be implemented by 2024.
GAFA Tax: Rationale
- The tax regulations now in place, which were designed with brick-and-mortar company models in mind, are ineffective at regulating internet services.
- The way that users contribute to the creation of value, which results in income, distinguishes technology companies from traditional enterprises.
- The intricate corporate arrangements by businesses generating significant revenues enable them to reduce their tax obligations by moving profits to low-tax countries. (Problem with Base Erosion and Profit-Sharing)
GAFA Tax: Implementation challenges
- The US withdrew from the talks because it thinks that the digital services tax unjustly singles out American businesses.
- The fact that the value of user contributions is evaluated subjectively in the originating nation is a major obstacle. This may lead to conflicts that could weaken the effectiveness of double taxation agreements.
- Lack of consensus on quantifying user contribution and differences in the interests of developed (residence) and developing (source) countries have furthered the delay in devising the global tax system for digital giants.
Digital tax in India:
India has the second-largest online users in the world, with over 690 million internet users, as of 2023. Hence, from the viewpoint of its tax revenue base, digital businesses could not be overlooked.
- The “Equalization Levy”: A tax aimed at foreign digital companies has been in place since 2016 and levied a 6% tax payable on gross revenues from online advertising services.
- In 2020, the equalization levy was further expanded. It applies from online advertising to all online commerce activities done in India by businesses that do not have taxable presence in India. The tax of 2% is applied on its revenues.
- Introduced for the purposes of corporate income tax, the term “Significant Economic Presence” (SEP) has grown to incorporate the following:
- An advertisement that is directed at a client who lives in India or who visits an advertisement using an Indian IP address.
- The sale of information gathered from a person who resides in India or uses an Indian IP address.
The sale of goods or services using information gathered from a person resident in India or using an Indian IP address.
