If ending Google Tax is quid, what is quo, for which quid is being given away?

The Google Tax, officially, an equalization levy on foreign service firms, does not generate much revenue. The tax, levied at the rate of 6% on the gross digital advertising placed by Indian entities on platforms owned by the likes of Google, Meta, and Amazon, has yielded less than ₹3,500 crore so far this year, according to a news report.

It eminently qualifies as an expendable pawn in a game of high-stakes chess you’re playing against a much more powerful opponent. Sacrifices are an integral part of the game, provided there is a strategic game plan that gives you advantage, after you give up carefully chosen pieces.

Also Read: Google tax: India mustn’t give up on a fair global taxation regime

In all fairness, we cannot expect the government to disclose its negotiating strategy even as vital talks are underway with the US administration on avoiding the reciprocal tariffs the Trump administration has said it would levy on India, as well as on other countries, come 2 April. The public at large will get to know only later, if giving up the tax, which previous US administrations have objected to, as well, has been made in vain or not.

Base Erosion and Profit Shifting

India is not the only country levying the a Google Tax. As many as 18 countries levy a so-called digital service tax on companies that generate revenue from a jurisdiction without necessarily being physically present in the jurisdiction. Most of such remote service providers are American tech giants, which create subsidiaries in low-cost jurisdictions to sell advertisement slots to companies around the world. These tech giants end up hoovering up revenue from a host of economies without paying any tax in those economies for the value they earn from them.

An ideal solution to giant companies generating revenue and profits from jurisdictions without paying tax to their authorities is a global, multilateral agreement to collect the tax centrally and distribute it among the countries from where the profits are generated, in proportion to the profit generated in each jurisdiction.

In fact, in the interdependent, globalized world, this is true not just of digital service firms. Transfer pricing, tax arbitrage making use of the world’s generous supply of low-tax jurisdictions—more widely known by the less genteel term, tax havens—and the canny brains at professional services firms such as PWC, EY, KPMG, and Deloitte, together make sure that the world’s largest and most profitable companies pay very little tax anywhere.

Also Read: India to drop ‘Google tax’ from 1 April amid US tariff threats

It is to tackle this problem, labelled by the Organization for Economic Cooperation and Development as Base Erosion and Profit Shifting, that a global minimum tax agreement was struck in July 2021, with the US finally joining in.

Global minimum tax agreement

It has two pillars. Pillar 2 envisages a minimum tax of 15% on corporate incomes in all jurisdictions. Pillar 1 envisages allocating the profits of globally large companies to different jurisdictions from which the company generates its revenues, even if the company does not have a physical presence (permanent establishment, in tax jargon) in those jurisdictions. In return, economies that levy a digital service tax are obliged to remove this levy.

However, the process of ratifying the agreement reached by 130 countries on a global minimum tax has stretched on, beyond the term of the Joe Biden administration that was willing to join it. One of the first executive orders issued by President Trump, after assuming office, was to pull the US out of the global tax agreement. Without US participation, the tax deal cannot be implemented.

The Google Tax was slated to die, but Trump has removed the rationale for its dignified death. Now, removal of the digital tax depends on US bullying, by means of the threat to levy steep tariffs on countries that defy the US.

India has significant service exports: In 2023-24, merchandise exports stood at $437.10 billion, while services exports contributed $341.11 billion. For services exports, the US is a vital market, and not just for services directly rendered in the US. India hopes, while making concessions in merchandise trade and minor other matters, to extract concessions in service exports, some of which are delivered by Indian service professionals travelling to the US to deliver services onsite, and need visas.

Also Read: Mint Explainer: Have India-US trade talks blunted Trump’s threat of reciprocal tariffs?

How this all plays out remains to be seen. What can be said at present is that dispensing with the Google Tax would make eminent sense if substantive concessions can be derived through the ongoing negotiations with the US.