India to drop unilateral digital taxes once global consensus builds up

India will drop its ‘equalisation levy’ on e-commerce once global consensus builds up on a more equitable tax rule covering tech giants, said a government official.

"The individual steps that India and other countries have taken specifically to tax digital economy firms indicate that the rules that exist today are not adequate to address the concerns around the erosion of tax base," said Rasmi Ranjan Das, joint secretary in the finance ministry.

Also Read | How rural schooling is going into the dark

Das said that lack of a global deal on how to tax technology companies that access customers in countries where they have no physical presence could lead to chaos.

“I hope we arrive at some agreement or consensus so that there is more stability across the world on how individual countries will tax income from cross border operations,” Das said at a virtual conference on ‘global tax policy reset—geopolitical developments’ organised by the Confederation of Indian Industry (CII) on Wednesday.

While it may not be possible for India as a country to wait for the global consensus on the issue to tax income generated in India by offshore tech firms, India is part of a general agreement that once a consensus is ready, all unilateral measures will be withdrawn, said Das.

“We from India’s side do not see unilateral measures as going on indefinitely,” said Das, adding that the Indian government was hopeful of a consensus on the issue.

New Delhi has been working closely with the G20 and BRICS nations to evolve a global deal on taxation rights over technology companies. However, common ground has been elusive on this emerging area of corporate taxation with some of the EU nations and India facing the disapproval of the US.

In the absence of a global deal, India introduced a 2% tax on e-commerce from April this year, expanding the ‘equalisation’ levy that was in place since 2016. Equalisation levy had originally targeted payments made to non-resident tech firms such as social media platforms for hosting online advertisements targeting Indian consumers.

The expansion of the levy to cover e-commerce led to the US initiating a trade investigation. India maintains equalisation levy on e-commerce is a fair, reasonable and non-discriminatory tax aimed at all offshore digital economy firms accessing Indian market and was not targeted at American corporations.

EU nations like France and the UK too had gone ahead with their plans to step up taxes on offshore digital economy firms that access their local consumer base electronically.

“What we are trying to do is a transformational change in the allocation of international taxation rights. That will take time. All countries agree that the rules framed in 1920 cannot continue in 2020,” said Das.

Last month, finance minister Nirmala Sitharaman said at the BRICS finance ministers and central bank governors' meeting that a consensus on taxation of digital economy firms was key to a sustainable and fair tax system.