By Nantoo Banerjee
India’s commerce department seems to be out of touch with the government’s intentional tax deals — bilateral or multilateral. In recent times, India has lost all tax cases against MNCs in international courts and tribunals. It also lost large undisclosed sums in fighting these hopeless litigations at home and abroad for years through appeals and counter appeals. Earlier this year, it suffered a massive face loss as a small British firm, Cairn Energy, threatened to seize Indian government assets after a $1.2 billion award in its favour in a long-running corporate tax case.
The Edinburgh-based energy firm was awarded damages by an international tribunal in the high-profile dispute with the Indian government. Cairn started identifying assets it could seize if the Indian government does not comply with the order. India’s retro-tax act had to be finally deleted. Yet, the government seems to refuse to learn. The latest case of India’s digital services tax (DST) on foreign companies in India has already upset the Biden administration, specially after an international community of 136 countries, including India, signed a ground-breaking global minimum tax agreement. It now appears that the government may have to withdraw DST unless it is prepared for legal battles in international courts.
Under the global minimum tax agreement, the participating countries are required to repeal such additional levies such as DST immediately. They are also required to commit that such taxes will not be levied in future. The tax deal for the digital age was initiated by the Paris-based Organisation of Economically Developed Countries (OECD) in support of a much needed international tax reform. It has been stated that between October 8, 2021 and December 31, 2023, or until the conclusion of multilateral dialogue on the international tax system, the participating countries will not impose digital tax on any corporation or enterprise
The OECD will ensure that multinational enterprises (MNEs) are subjected to a minimum 15 percent tax rate from 2023. However, a legal friction between India and the US seems to have already begun on the issue as India says its DST does not have extra-territorial application as it applies only on the revenue generated from the country. The US, on the contrary, strongly feels that India’s DST is discriminatory having an adverse impact on American commerce and is actionable under the trade act. The US Trade Representatives (USTR) further stated that it had consultations with the Indian government on the issue on November 5, 2020. The USTR describes DST as “an outlier” which burdens US companies by subjecting them to double taxation.
India adopted the operative form of its DST on March 27, 2020. It imposes a two percent tax on revenue generated from a broad range of digital services offered in India, including digital platform services, digital content sales, digital sales of a company’s own goods, data-related services, software-as-a-service, and several other categories of digital services. India’s DST applies only to “non-resident” companies as of April 1, 2020. The USTR said that DST, by its structure and operation, discriminates against US digital companies. The USTR feels that DST is unreasonable as it is inconsistent with principles of international taxation, including due to its application to revenue rather than income, extraterritorial application, and failure to provide tax certainty.
The USTR investigation report determined that three aspects of India’s DST are inconsistent with principles of international taxation. Stakeholders have found the text of the DST unclear and ambiguous. “This amounts to a failure to provide tax certainty, which contravenes a core principle of international taxation,” the USTR alleged and said “the DST taxes companies with no permanent establishment in India, contravening the international tax principle that companies should not be subject to a country’s corporate tax regime absent a territorial connection to that country.” The USTR report further claims that DST creates an additional tax burden for U.S. companies, which could exceed $30 million per year. A tug of war between the Indian government and the USTR could have been avoided if the union commerce ministry did not insist on DST on foreign companies operating in India at a time when the country was engaged in an international dialogue on the global tax system.
Incidentally, the global minimum tax agreement does not seek to eliminate tax competition. It only puts multilaterally agreed limitations on it. The agreement will see countries collect around US$150 billion in new revenues, annually. According to reports, ‘Pillar One’ will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises. It will re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there
Specifically, multinational enterprises with global sales above EUR 20 billion and profitability above 10 percent will be covered by the new rules, with 25 percent of profit above the 10 percent threshold to be reallocated to market jurisdictions. Taxing rights on more than US$125 billion of profit are expected to be reallocated to market jurisdictions each year. ‘Pillar Two’ introduces a global minimum corporate tax rate at 15 percent. The new minimum tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around US$150 billion in additional global tax revenues annually.
Notably, only four countries absented themselves from the OECD-led international tax agreement. They are: Pakistan, Kenya, Nigeria and Sri Lanka. It must be accepted that the international tax agreement does not guarantee that enterprises will strictly follow the rules. Tax evasion is a common concern across the world. It will continue to remain so. The US itself is said to be a major victim of tax evasion, costing the country around one-trillion dollar in revenue every year. Traditionally, India’s own internal tax administration has been extremely poor. As of February, 2020, there were 88,000 appeals pending before the Income Tax Appellate Tribunal (ITAT), said its chairman, Justice PP Bhatt. Tax evasion litigations pending before India’s High Courts are said to be close to 52,000 cases amounting to US$ 500 billion. DST cases, if come up against foreign companies, may have to be fought in courts both in India and outside. (IPA Service)