The Government should take the stakeholders, the multi-nationals concerned, the service providers in India, trade bodies, etc. and evolve a process that is equitable to all as far as the imposition of digital tax is concerned writes Karthik Kumar, Director, Rage Communications.
Apparently the Central Board of Direct Taxes (CBDT) has mooted a proposal to levy a withholding tax of 6% - 8% on digital transactions, which, among other things covers, digital advertising, ecommerce, infrastructure services, etc. The purported reason for such a tax is, “…to prevent tax avoidance by multinationals.”
The Government’s noble intentions cannot be faulted. Equally, the Government’s ham-handedness in proposing this also cannot be ignored. Before, we go onto why it is ham-handed; it would be worthwhile to keep the amount the Government wishes to raises as revenues in 2016 – 17, Rs 1,377,022 crore. We shall come back to this number shortly.
Let us first take how much revenue can be potentially realized by the digital tax. After a very generous computation of the total expenditure on digital services, the digital tax that would apply will probably be about Rs 50,000 crore. Assuming all of this is subject to the withholding tax, the Government can hope to raise Rs 4,000 crore from the digital tax. In itself this is not a small number, but considered as proportion of the total revenue to Government in FY 16-17, the proposed digital tax will only be a measly 0.3%.
The moot point is, does the Government want to do so much for so little!
What is this so much about?
Take digital advertising. For the sake of argument, let us assume all digital advertising in India goes only to Google and Facebook, and all that revenue is not taxed because the two companies do not report the revenue in India. Small entrepreneurs who are typically charged the expenditure automatically without any formal billing process do a vast portion of the digital advertising. How does the Government expect such advertisers to deduct the withholding tax and pay it to the Government? Moreover, should Google/Facebook, decide to challenge their tax liabilities, does the Government really expect the two companies to provide documentary evidence which could potentially run into millions of withholding certificates, assuming there is a mechanism by which Google and Facebook can collect it.
Let us look at another aspect of the logistics of collecting the withholding tax. Consider Amazon whose cloud hosting service, AWS, is very popular in the digital world. As anybody dealing with AWS knows, the payment process for its services is automated and invoices are machine issued. Unless AWS issues an invoice accounting for the withholding tax, the Indian user of AWS will be unable to withhold the tax. Instead, he will be forced to pay the 8% tax to the Government over and above the payment made to AWS. In such a scenario, the digital tax would become a digital millstone around the neck of the Indian user of AWS. Is that CBDT’s intention?
Does all this mean that the Government of India should not tax potential leakage from revenue earned by the multi-nationals in India. No.
However, rather than creating an unwieldy mess, the Government should take the stakeholders - the multi-nationals concerned, the service providers in India, trade bodies, etc. - and evolve a process that is equitable to all. And, the icing on the cake may well be that the stakeholders themselves will do a significant amount of the work, saving the Government the costs and the blushes involved in collecting the tax!