India faces a showdown with Joe Biden’s government after announcing one of the world’s toughest taxes on foreign tech companies.
The government of Narendra Modi this month announced several changes to a “countervailing charge” on digital services of 2 percent introduced in April last year, which analysts said represented an extension of the tax.
The measure, which applies to all areas from e-commerce to video streaming, follows a similar levy of 6 percent on digital advertising from 2016, which is known as the “Google tax”.
The latest levy is one of several examples of courageous but controversial moves New Delhi has taken to take control of US tech companies. These range from a strict data protection law that finds its way through parliament to efforts to regulate content on social media platforms such as Twitter.
However, India’s new countervailing levy carries the risk of a trade dispute with the US, which in the last few days of the Trump administration has been described as “discrimination in its clearest form”. The new levy increases the prospect of retaliation and threatens to derail Biden’s efforts to improve trade ties, which have affected everything from agriculture to Harley-Davidsons.
If the countervailing levy were not collected at all, India would not have the ability to negotiate that it now has
“It feels like I’m watching a thriller. It happens every couple of weeks, ”said Suranjali Tandon, assistant professor at the government-sponsored National Institute of Public Finance and Policy.
India’s levy comes when governments around the world question the role big tech plays in their societies, such as its impact on the news media and the level of taxes they pay.
New Delhi was an early and aggressive proponent of levies on companies like Facebook and Google, which have been criticized for doing abundant business in the country but paying limited taxes due to their offshore structures.
New Delhi was frustrated with the slow progress of the OECD in developing a global model for taxing technology and was making progress. Several other countries such as the UK, France and Italy have also introduced their own taxes on digital services.
“You can think of it as a way to increase revenue and get rid of the problem or get everyone to the table to speak on your terms,” Tandon said. “The latter does it well enough. If the countervailing levy were not levied at all, India would not have the ability to negotiate that it has now. “
The U.S. sales representative, who investigated multiple nations’ digital taxes, said India’s counterbalance levy is broader than anywhere else. 86 out of 119 companies likely to have to pay the levy are Americans, which would lead to compliance costs in the millions for individual companies.
Analysts aren’t sure whether Biden will enforce the tough stance of Trump, who levied a 25 percent levy on French luxury imports in retaliation for his digital tax.
“It’s getting tougher, a sensitive issue,” said Meyyappan Nagappan, director of international tax practice at Nishith Desai Associates law firm.
Nagappan said the wide scope and low threshold of the countervailing levy – taxable businesses with annual sales of Rs 20 million ($ 275,000) and above – could dissuade smaller businesses from India altogether.
“These are the types of companies that won’t go to court,” he said. “They just won’t come to India.”
India recently tried to shift the balance of power with Silicon Valley. It’s an argument with Twitter, for example because of the platform’s reluctance to comply with demands to remove content related to recent farmer protests.
New Delhi also took an interest in Australia’s controversial new media law. Prime Ministers Modi and Scott Morrison discussed the legislation last week.
Getting foreign technology companies to pay more taxes is an urgent priority for India. With 1.4 billion residents, rising incomes and widespread smartphone adoption, business is booming for everything from e-commerce to cloud services.
However, the country is grappling with a chronically low tax base, a challenge that only worsened when the coronavirus pandemic resulted in a significant loss of revenue.
The authorities withdrew almost Rs.15 billion from the countervailing levy between April and the end of January, down from just Rs.3.4 billion in the year it was introduced in 2016.
Mukesh Butani, managing partner of the law firm BMR Legal, said that from the government’s point of view, the rationale for the equalization levy is “very simple”.
“You are doing an economic activity,” he said. “You may not have a physical presence. But you have an economic connection because you do business with my citizens. “
However, India’s approach to digital tax risk bolsters its reputation as a difficult place to do business, the result of years of disputes with companies like Vodafone and Cairn Energy over post-levy levies.
India in 2018 also stepped up its pursuit of offshore tech companies by noting that any company with a “significant economic presence” in India would face local taxes rather than a physical presence. However, most western companies are shielded from the provision for the time being thanks to bilateral tax treaties.
Analysts disagree on whether India’s gambling pays off. Ashish Goel, attorney at India’s Supreme Court, said this could ultimately help India push for better tax conditions on the global stage.
“We can’t wait any longer,” he said. “There should be a solution that is friendlier for developing countries and not just for industrialized countries.”