Digital Tax

This paper does give a brief outline of the introduction and history of digital tax. In this digitalizing economy, the concept of digital tax is an important aspect which one needs to understand but should ensure that the taxes being levied are non- discriminatory and unreasonable. Certain limitations are being prescribed while levying the digital tax and that aspect is also being covered in this paper. Special attention is being given to the probe which is launched by the United States of America against the Indian digital taxation policy where the taxes are being levied on the American tech companies by India. The paper does the emphasis on the steps which are taken by the Indian government to levy digital taxes. Moreover, some examples of digital tax imposing countries are also being given which particular reference to France, Austria, Brazil, the Czech Republic, the European Union, Indonesia, Italy, Spain, Turkey, and United Kingdom.

Introduction

Digital goodsand services are the programs, music, videos, or other electronic files that users download exclusively from the Internet. The digital tax is reaching at every corner of the globe and as the result, approximately 50 different authorities have made changes in their laws regarding the taxation policy to introduce the concept of digital tax. With the widespread growth of digitalization, the users do have the facility of purchasing digital services or having it for free therefore the business on the digital platforms is increasing at an alarming rate. In this digitalizing business environment, challenges are being created on the subject of imposing digital tax amongst many countries. The taxes imposed on these digital goods or services is called as digital tax or digital service tax(DST). The laws for the imposition of such taxes are being levied by the Central government of the country under the Finance act and since it is not an income tax it’s out of the scope of tax-related treaties. In today’s era where the world is getting digitalized the concept of digital tax is getting popularized. Many countries including India, the European Union, and France are the ones against whom the United States of America has ordered a probe. Digital services tax which is imposed on digital goods or services has the base of the revenues earned by the tech companies particularly Face-book, Amazon, Google, etc that means the digital tax is being collected on revenues earned by the companies but not the profit the reason behind the same is the ease of transferability.

History of Digital tax

The United States federal government in the year 1997 does impose a limit on the tax being levied on digital goods and services. The Internet tax freedom act (ITFA) does restrict the use of od internet services which gives access to content, information, email, or other services offered over the Internet to the users. The Act does exempt the taxes levied before the laws that were written and for sales taxes on the online purchasing of goods.

These laws amended three times since the time of its enactment. The first amendment in the statute extends to the duration of the act. The second amendment defines Internet access which does include certain telecommunication services<a href="http://<!– wp:list –> <ul id="block-3415e7d4-2f71-473c-8d12-687538dea11a"><li>[1]<a href="https://economictimes.indiatimes.com/news/economy/foreign-trade/india-us-can-close-limited-trade-deal-before-nov-elections-ball-in-us-court-goyal/articleshow/77876467.cms" class="rank-math-link">https://en.wikipedia.org/wiki/Taxation_of_digital_goods</a></li><li> <a href="https://economictimes.indiatimes.com/news/economy/policy/localisation-heat-data-bank-here-may-help-government-debit-" class="rank-math-link">[2]</a><a class="rank-math-link" href="https://economictimes.indiatimes.com/news/economy/policy/localisation-heat-data-bank-here-may-help-government-debit-taxes/articleshow/67120911.cms">https://economictimes.indiatimes.com/news/economy/policy/localisation-heat-data-bank-here-may-help-government-debit-</a></li><li><a href="https://economictimes.indiatimes.com/news/economy/foreign-trade/india-us-can-close-limited-trade-deal-before-nov-elections-ball-in-us-court-goyal/articleshow/77876467.cms" class="rank-math-link">[3] https://economictimes.indiatimes.com/news/economy/foreign-trade/india-us-can-close-limited trade-deal-before-nov-</a> <a href="https://economictimes.indiatimes.com/news/economy/foreign-trade/india-us-can-close-limited-trade-deal-before-nov-elections-ball-in-us-court-goyal/articleshow/77876467.cms">elections-ball-in-us-court-goyal/articleshow/77876467.cms</a></li></ul> [1]. The third amendment elaborates the prohibition of tax but narrows down the definition of the Internet, which says ” internet access does not include voice, audio or video programming, or other products and services except those which are related to a homepage, email, instant messaging, video clips, and personal storage capacity.

Limitations

One of the limitations being imposed on Internet taxation policy is seen in the case of Quill Corp. v. North Dakota, it’s a United States Supreme Court case, in which it was held that under the dormant commerce clause, goods and services which purchased through digital services order cannot be subject to the tax collected by the state unless the vendor has a connection with the state levying the tax. The dormant commerce clause can apply to the downloads from internet services too.

Probe launched by the United States against India’s digital tax

Austria, Brazil, the Czech Republic, the European Union, Indonesia, Italy, Spain, Turkey, United Kingdom, and India are the countries which are being investigated by the United States of America on the grounds of imposing of discriminatory or un-reasonable taxes being levied on the American tech companies such as Facebook, Google, Amazon, etc.

Moreover, the trade representative United states (USTR- United States Trade Representative) is the investigating authority and do says that if anything faulty is found on the part of the countries then the countries would face the sanction orders. Section 301 of USTR do give the power to USTR to investigate into the matter where discriminatory or un-reasonable taxes are being imposed by other countries

Reason of Imposing of Digital Taxes

The companies (American tech companies), do transfer the money (revenue) earned in the home countries to the countries where tax imposition rates are less, therefore, the amount of tax which is to be paid cannot be paid and a sense of tax evasion do comes into the picture, therefore, to get rid of the problem the concept of digital tax was introduced for example- American tech companies like Apple, Google, Facebook, etc have their European headquarters in Ireland which levies lower rate of taxes than other major European Union countries[2].

An Indian example – According to the report of Economic Times, 2018- Google in India remitted it’s 50- 60% of the revenue that is approximately Rs. 16,199.6 crore ($2.18 billion) to its parent companies subsidiaries in Singapore and Ireland moreover they(Google) showed it as their miscellaneous expense thereby reducing it’s profits here, therefore, a reduced amount of tax would be paid to India.

Some Recent Incidents of Similar Nature

In 2016 European commission ordered Apple to pay $15 billion to Ireland as they believe that through malpractices illegal tax benefits are enjoyed by them for the last 20 years. A petition is also being filled by apple against the European Union.
In 2019, July France enforced a digital tax of 3% on revenues earned by the large internet companies (American companies) as revenue cannot be moved easily as profits can.

Steps were taken by the Indian government

Since 2016 India has charged an equalization levy, 6% on advertisement spends of technology companies, and because of this only the Indian government in the financial year of 2018-19 has collected rs. 900 crore as tax. Moreover, through the financial act of 2020, the government expanded the scope of the equalization levy to revenues generated by the non-resident e-commerce companies operating in India[3]. 2% of the digital service tax came into effect on 1st April. The tax came as a surprise to the e-commerce companies as the provision was not part of the financial bill and was introduced as an amendment at the last minute before the parliament passed the bill.

This 2% of DST which came into effect from 1st April is what the USTR is seeking to investigate upon. The efforts have displeased the US, which says it harms the American companies. France, in particular, has faced a lot of heat because of the imposition of a 3% Digital service tax.

Conclusion

Here USTR is initiating its probe on its first stage against the various countries including India. Here the government of India can represent itself by telling how the unfair diversion of money is being done by the American tech companies because of which less revenue is being earned by India and this is the reason for imposing DST. Moreover, USTR will also see that the introduction does diverge from the norms reflected in the international tax system or not and if any kind of action is taken by USTR against India then it will affect the India- US trade deal.

Frequently Asked Questions

What is another name of digital tax and who is the authority to impose it?
France is facing a lot of pressure by (USTR- United States Trade Representative), why?
Which country imposes a fine on “Apple company” and why?
By what means did the Indian government collect the tax of 900CR?
Does the imposing of digital tax come under the tax treaties signed between the countries if yes then explain?

References

<a href="http://<!– wp:list –> <ul id="block-3415e7d4-2f71-473c-8d12-687538dea11a"><li>[1]<a href="https://economictimes.indiatimes.com/news/economy/foreign-trade/india-us-can-close-limited-trade-deal-before-nov-elections-ball-in-us-court-goyal/articleshow/77876467.cms" class="rank-math-link">https://en.wikipedia.org/wiki/Taxation_of_digital_goods</a></li><li> <a href="https://economictimes.indiatimes.com/news/economy/policy/localisation-heat-data-bank-here-may-help-government-debit-" class="rank-math-link">[2]</a><a class="rank-math-link" href="https://economictimes.indiatimes.com/news/economy/policy/localisation-heat-data-bank-here-may-help-government-debit-taxes/articleshow/67120911.cms">https://economictimes.indiatimes.com/news/economy/policy/localisation-heat-data-bank-here-may-help-government-debit-</a></li><li><a href="https://economictimes.indiatimes.com/news/economy/foreign-trade/india-us-can-close-limited-trade-deal-before-nov-elections-ball-in-us-court-goyal/articleshow/77876467.cms" class="rank-math-link">[3] https://economictimes.indiatimes.com/news/economy/foreign-trade/india-us-can-close-limited trade-deal-before-nov-</a> <a href="https://economictimes.indiatimes.com/news/economy/foreign-trade/india-us-can-close-limited-trade-deal-before-nov-elections-ball-in-us-court-goyal/articleshow/77876467.cms">elections-ball-in-us-court-goyal/articleshow/77876467.cms</a></li></ul> [1]https://en.wikipedia.org/wiki/Taxation_of_digital_goods
[2]https://economictimes.indiatimes.com/news/economy/policy/localisation-heat-data-bank-here-may-help-government-debit-
[3] https://economictimes.indiatimes.com/news/economy/foreign-trade/india-us-can-close-limited trade-deal-before-nov- elections-ball-in-us-court-goyal/articleshow/77876467.cms

Introduction

History of Digital tax

Limitations

Probe launched by the United States against India’s digital tax

Reason of Imposing of Digital Taxes

Some Recent Incidents of Similar Nature

Steps were taken by the Indian government

Conclusion

Frequently Asked Questions

References

Published by Anirudh Gupta

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