All about Digital Tax
                     All about Digital Tax
The Digital world
 Even during the coronavirus outbreak, efforts to 
change the way digital business models are taxed 
continue. The OECD announced that efforts 
connected to their team’s work on digital taxation 
are continuing at full steam even as they shift to 
telework. The scope of the OECD work is expansive 
and the challenges for an international agreement 
seem even greater.
Source: Google Images
Tax for the digital business
 As many around the world are learning the skills 
of remote work and there is an increasing 
reliance on cloud-based technologies to support 
productivity, politicians are unlikely to abandon 
efforts to redesign the international tax system 
around digital business models. India announced 
that it would also tax foreign digital companies
Source: Google Images
Equalization levy
 India announced that its tax aimed at foreign digital 
companies will be expanded. The equalization levy 
has been in place since 2016 and was originally 
designed as a 6 percent tax on gross revenues from 
online advertising services. In fiscal year 2017-2018, 
the revenue from the equalization levy was INR 550 
crore. Only nonresident businesses are subject to the 
tax.
Source: Google Images
More of a tariff
 As a tax on revenue, the equalization levy is 
essentially a tariff and is not based on ability to pay. 
Businesses with higher profit margins on their digital 
business with India will face a lower marginal tax rate 
than businesses with lower profitability. The 2 percent 
revenue tax equates to a 20 percent income tax if a 
business has a 10 percent profit margin in India. 
Source: Google Images
Significance
 The Indian equalization levy is significant because it 
is much broader than the digital services taxes being 
put in place in Europe, and it is yet another unilateral 
measure that is contrary to the efforts of the OECD. 
India is a significant player in the digital tax 
negotiations and is already eyeing potential revenue 
from the OECD outcomes.
Source: Google Images
SEP
 In 2018, India recognized virtual presence as 
constituting nexus for the purpose of asserting 
taxing rights and introduced the concept of 
Significant Economic Presence (SEP) in its tax 
laws. The OECD acknowledges that without 
effective changes to profit allocation rules, the 
introduction of standalone nexus provisions is 
likely to be ineffective.
Source: Google Images
Challenges
 The SEP provisions may be interpreted to mean that 
the entire income attributable to a transaction giving 
rise to a SEP is taxable, even though operations of 
such business activities may be carried outside India. 
This leaves significant room for ambiguity and raises 
questions. The SEP provisions, in the present form, is 
likely to increase controversy in India without a 
meaningful increase in profit allocation and tax 
collection.
Source: Google Images
Much-needed income
 The temptation to apply special taxes to digital 
firms right now when they may be more profitable 
than the rest of the global economy will be strong. 
Over the course of time, broad-based, neutral 
policies should be the tools of choice for taxation. 
A tax base that relies too heavily on a particular 
sector could be left standing in the cold when the 
economic winds shift.
Source: Google Images
Future
 With newer technologies such as blockchain, 
virtual reality and artificial intelligence on the rise, 
the pace of digitalization is only going to 
accelerate. Any new legislative enactment must 
be fully considered, and its broader impact fully 
evaluated, before being implemented. A unilateral 
move can only expose India to retaliatory 
measures from other countries.
Source: Google Images