India needs long-term tax policies for evolving tech environment

The rich countries grouping known as G-7 has just taken several momentous decisions that could affect the way in multinational giants especially big tech pay taxes globally. It has proposed that first, these companies must pay taxes in the countries where they are doing business and second that there should be a minimum global corporate tax of 15 per cent. Both these decisions should be welcomed by this country as it too is trying to formulate a way in which local laws can be enforced on tech giants that are operating in multiple countries.

The immediate motivation for the G-7 decisions is that there is a growing feeling that the tech giants are getting away without paying their due share of taxes in many countries in which they are operating. Regulatory agencies have begun taking action in the European Union, the UK and Australia on various revenue and content related issues. The latest salvo has been fired by France which has imposed a fine of 268 million dollars on Google for giving preference to its own ads and thus stifling competition. Australia has been carrying out a campaign to ensure that the tech giants pay tax in the country along with trying to make these companies pay for news content under a mandatory code. Regulators in the EU and the UK are also launching anti-trust investigations against Amazon, Apple, Google and Facebook.

The second driver behind the minimum corporate tax decision is the fact that many of these multinationals look for tax havens to park their funds. By, ensuring that every country, however, small imposes a minimum 15 per cent tax, other countries will not be disadvantaged compared to them. Those that are now worried include countries like Ireland which currently has a minimum corporate tax of 12.5 per cent. In addition, there are smaller tax havens like Netherlands, Luxembourg and Panama, apart from several in the Caribbean which corporates routinely use as a base for investments.

The US has been pushing the idea as is evident from the fact that Treasury Secretary Janet Yellen has spoken of the "race to the bottom" for taxes by many countries. It is also significant that the move comes even as the Biden administration is planning to raise corporate tax in that country from 21 to 28 per cent.

As for India, it is not likely to be affected as corporate tax rates are well above 15 per cent but have recently been brought down to levels comparable with other neighbouring Asian countries. The tax rate had been reduced by Finance Minister Nirmala Sitharaman to 22 per cent for domestic companies and 15 per cent for new companies. The effective rate of taxation is about 26-29 per cent for companies that seek exemptions on various grounds.

It still has to be seen when the decision will actually be implemented globally. The G-7 decision will now be presented at the next meeting of the wider conclave, G-20 which includes India as well. Even subsequently, it has to be accepted by the wider community of countries.

In case it does become a global benchmark, it will be useful for all countries trying to battle the flow of funds into tax havens. In India's case, Mauritius had become a base for many countries to set up shell companies and carry out investments in India from this island nation.

The other issue, however, of ensuring that multinational conglomerates are made to pay more tax in the jurisdictions in which they operate is equally of relevance to this country. It will enable taxing of some of the profits made by these companies based on the revenue generated in the country of business rather than where the firm is located for tax purposes. The formula which has been evolved by the OECD envisages that tax can be raised from at least 20 per cent of the profits exceeding a ten per cent margin for the most profitable firms.

European countries have also begun imposing digital services taxes on the tech giants which has become a matter of negotiations with the US as for India, it has also imposed what is known as an equalization levy on the digital giants to ensure equitable taxation. The latest developments, however, ensure that India will continue to remain an attractive investment destination, given that the gap between taxation here and in other countries will not be large.

The details of the formula cleared by the rich countries, however, needs to be studied in greater depth by the revenue authorities in this country. It could potentially enable India to also find ways of taxing Big Tech as well as other multinationals in a rational manner. Evolution of long-term policies for taxation is needed now to take into account the changes in the global scenario after the advent of technology companies that are now crossing every border and operating in virtually every country in the world. The government needs to formulate a revenue policy that is not just aimed at maximizing revenue in the short run, but one that meets the needs of a modern technology-based environment.