How new global tax rules may reshape India?

Synopsis: The conventional global tax system is changing, with several countries, including India, imposing a digital service tax and participating in a new global initiative to modernize tax rules.

Why there’s a need for new global tax framework?

The new tax framework seeks to tackle digital economy firms in particular since they do not easily fit into the conventional concept of corporate taxation, which relies on a fixed place of business in a market.

Until now, MNCs could create a registered legal entity in multiple countries and ultimately report a bulk of their revenues in jurisdictions with a very low tax rate.

Since there was no global agreement, individual countries had to compete with each other by lowering corporate tax rates, which is described as “a race to the bottom”. This affected the revenue for most nations.

Further, countries are unable to tax tech companies in jurisdictions where they make their profit.

In this context, OECD, is involved in preparing the blueprint for the new global tax deal. The global solution is aimed to ensure multinational entities pay more taxes in countries where they have customers or users than from where they operate.

How India taxed global giants till now?

India pioneered the concept of digital taxation by levying a unilateral digital service tax called equalization levy in 2016 on online advertisements. This has subsequently been expanded to cover the sale of goods and provision of services through e-platforms.

India’s move to impose an equalization levy has since been followed by several other countries such as France, Austria, Chile and the Czech Republic.

How will it benefit India?

India with a large consumer base will have a bigger share of the pie as compared to the other market jurisdictions

Since these companies would in any case be paying taxes in the markets where the consumers are located, it may encourage them to have physical proximity to their markets by way of having offices to cater to the unique preferences of each geography.

A dent in the appeal of certain low-tax countries could in turn boost India’s attractiveness at a time when India is offering tax incentives for setting up factories locally.

India’s lowest corporation tax is on par with the proposed global minimum tax rate, so it is not likely to impact new investments into India.

What are some issues related with it?

Firstly, India along with other Group of 24 (G24) member nations, has objected to the withdrawal of unilateral measures like the equalisation levy (EL) in one go. They are worried that the proposed global digital tax deal covering only top 100 companies may not lead to sufficient revenue for developing countries.

Secondly, the developing countries grouping also recommended that no less than 30 per cent of tax on non-routine profits of these companies should be allocated to market jurisdictions where they have sales.

Thirdly, India had proposed allocation of profits under fractional apportionment method. Based on this method the entire profit of the group will be apportioned to different countries in which the group operates through a formula, taking into account factors like employees, assets, sales, and users

What is the way ahead?

The major changes in the international tax regimes, offers a unique opportunity for India to attract foreign investment.

With continued policy rationalization, increased focus on ease of doing business and more business-friendly policies, India should regain its status as one of the fastest-growing large economies in the near future.

Source: This post is based on “How new global tax rules may reshape India?” published in Live Mint & “India, other G24 nations call for gradual withdrawal of ‘Google tax’” published in Business Standard on 23rd Sep 2021.