India seeks solution on taxing digital firms

Finance minister Nirmala Sitharaman at the G20 meeting of finance ministers and central bank governors at Fukuoka in Japan. Bloomberg (Photo: Kiyoshi Ota/Bloomberg)

Finance minister Nirmala Sitharaman called upon the G20 members to urgently fix the issue of taxing profits made by digital economy companies in countries where they do not have significant physical presence.

The work on tax challenges arising from the digitalization of economy is entering a critical phase, Sitharaman said on Sunday at the G20 meeting of finance ministers and central bank governors at Fukuoka in Japan, her first foreign engagement after taking charge of the ministry.

“In this respect, the FM strongly supported the potential solution based on the concept of ‘significant economic presence’ of businesses taking into account the evidence of their purposeful and sustained interaction with the economy of a country. This concept has been piloted by India and supported by a large number of countries including the G24,” the finance ministry said.

As offshore digital companies such as Facebook, Google, and Netflix have little presence in India, taxing their profits is not possible. This prompted the government to roll out equalization levy as a tax deducted at source on payments made to them by Indian firms with effect from June 2016.

The aim is to bring offshore companies with ‘significant economic presence’ in India into the tax net to address the shortcomings in taxing the digital economy. Offshore entities with a minimum number of customers are deemed to have a business presence in India, making them taxable.

However, India opposed attempts by developed countries to formulate an e-commerce policy outside the World Trade Organization (WTO) framework. Advocacy on free trade should not necessarily lead to justification of data free flow, India’s trade minister Piyush Goyal said at the G20 ministerial meeting on trade and digital economy. “Issues of privacy and security should be given due consideration, in the debate on data free flow with trust. Clarity on all these issues is essential, before embarking on ‘rule making’ on e-commerce. Developing countries need time and policy space to build deepest understanding of the subject and formulate their own legal and regulatory framework before meaningfully engaging in e-commerce negotiations,” he said.

Members exchanged views on various issues, including the concept of data free flow with trust and WTO discussions on e- commerce, bearing in mind the importance of ensuring that all nations realise their opportunities, said a joint statement after the ministerial meeting on trade and digital economy.

“Discussions should continue to enhance the benefits of digitization, which is transforming every aspect of our economies and societies, and can contribute to economic growth, job creation, inclusion, development and innovation,” according to the statement.

Members affirmed the need to handle trade tensions and foster mutually beneficial trade relations, especially in view of the escalating trade war between the US and China, it said. “We note that trade and investment growth slowed in 2018 and that this is contributing to a weaker global growth outlook for 2019-20 than previously projected. While growth is expected to increase in 2020, downside risks arising from the current trade environment could undermine this growth,” it said.

India has opposed reforms proposed in the multilateral trading system that undermine the rights of developing countries, calling for reforms that inspire confidence among all members.

The abrupt push to alter rules of the institution midway has led to disruptions in world trade, just when member countries were beginning to enjoy the benefits of free trade, Goyal said. “India believes that the reform process should not undermine the WTO’s fundamental principles, namely, ‘Special and Differential Treatment’, ‘Consensus’-based decision making and objective of ‘Development’. The concerns of all member countries must be accommodated. The reform process should begin with reviving the dispute settlement mechanism by allowing re-nomination of appellate body members at the earliest,” he said.

The US’ war against “unfair trade” has extended to the WTO. It has refused to appoint judges to the appellate body, which is the highest dispute settlement body of the multilateral trading system. The appellate body is set to become defunct by December with only one member left in the panel. The US also insists that large economies such as China and India should voluntarily give up benefits of special and differential treatment available to developing countries under WTO rules.

The joint statement, however, noted that members will work constructively with each other to undertake necessary WTO reform with a sense of urgency, including in the lead-up to the 12th WTO ministerial. “We agree that action is necessary regarding the functioning of the dispute settlement system consistent with the rules as negotiated by the WTO members,” it said.