Digital taxes are nothing new so to speak in contemporary society. But living in India have you ever wondered how much our country benefits from digital taxes alone?
It goes upto ?4,000 crores approximately. Ever wondered how India earns so much with this kind of digital taxation? It is through the taxation policy that the nation implemented from 2016 onwards.
Now, let’s take a look at what digital taxes are and how it is relevant in the Indian economy.
What exactly is the digital tax scheme?
The digital tax was first implemented by the Indian government back in 2016 which can also be termed as an equalization levy. This came into existence because of the unfair tax advantage that was taken by foreign companies in India. Before the establishment of digital taxes foreign companies were able to make profit from consumers in India by saying that their companies are based in somewhere like Ireland which considerably imposes very less tax. This allows foreign investors to make good profit from India without actually paying anything for it. Companies from the UK, US and Australia began to do well with their business in India.
At this point of time, the Indian Parliament passed the Finance Act of 2016 to leverage the money created by digitalization. The equalization levy is basically a fee that is not dependent on income to service. Moreover, this only refers to international businesses. This was originally taxed at only 6% and was restricted to marketing services alone. It might be interpreted as a tax levied deducted at the moment of purchase by the consumer of the commodities. The equalization levy was increased to 6% for all digital businesses as well.
How is India benefiting from the digital tax scheme?
The digital tax scheme came into existence because of the excessive advantage gained by foreign companies that seriously affect the functioning of the domestic companies. India first started with an equalization levy of 6% tax on companies like Google which had a major market in Indian society because they had really great production value among Indian advertisers.
Due to this, the Indian government came to an agreement on the taxation rules which meant that all the multinational companies had to pay at least 15% of their income through the countries that they operate. Eventually, companies like Microsoft, Google, and Amazon had to pay taxes for their business in India. There was also a 2% tax levy for foreign e-commerce companies as well.
This ultimately made things easier for the domestic companies in India and also the bonus for India came in the form of revenues. India collected around ?1,136 crores in digital tax in the year 2019-20 followed by ?2,057 crores the next year. In 2022, India has recorded an unbelievable hype of 100% income from the previous year making it ?4,000 crores?.
The role of Organization for Economic Co-operation and Development
The digital taxes imposed by each country were arbitrarily decided by their governing bodies. Each county had the luxury to decide the value of their taxes. India first came up with 2% introductory tax. European countries had taxes up to 5% whereas Kenya had only 1.5%. The problem really was with the American multinational companies which owned so many of them like Netflix, Google, Meta, Google and Amazon. The US government was not at all happy with this and they hit others back with their taxations being as high as 25% especially on products from India.
This is when OECD, an organization with some worldwide influence and an extraordinary capacity to resolve disputes interfered. They built a model to settle matters and bring uniformity among the taxes imposed by all the countries around the world. The 140 countries which had investments were put around a table to sign a treaty between them.
The new proposal by OECD
Two pillars were introduced by the Organization for Economic Co-operation and Development to end this conflict.
- Pillar one: International firms having worldwide sales of more than 20 billion and a profit margin of 10% will be taxed on income on whatever they transact, regardless of their domestic market.
- Pillar two: They settled on a worldwide minimum tax rate of 15% and mandated that each and every firm pay at least 15% tax on earnings, regardless of where they established their offices.
India and other 135 countries mutually agreed to this proposal and this will be ultimately in action from 2023 onwards. This began to create pressure among the companies as they had to make sure that they are having a great deal of business. To break the high barrier, companies must have significant earnings. As a result, if they merely chose those selected corporations and forced them to charge their debts, the tax receipts may be insignificant. In reality, by adhering to the equalization levy and the online tax, India might raise more income.
What the future beholds for India?
Although the United States dropped the charge, India has refused to do so since worldwide tax laws have not yet been enacted. Yet, India and the United States have agreed to treat the Equalization Levy as a benefit towards upcoming taxes. These deductions will be credited starting from April 1, 2022, and continuing through March 31, 2024, or until the worldwide taxes are resolved. Even though the US Treasury Department has praised the arrangement with India, the Indian administration has not commented. Even internet behemoths like Amazon, Google, and others are keeping quiet about the latest tax changes that could affect their businesses.
How would this impact the gaming industry in India?
The gaming Industry in India is progressing at a rapid pace and if digital India is to flourish, the online gaming industry requires improvements rather than charges. Based on the All India Gaming Federation research, the internet gaming sector in India is predicted to develop at a compound annual growth rate (CAGR) of 22% to $2 billion by 2023, up from $906 million in 2019. And the digital taxes that are being levied on the industry is highly challenging.
The gaming sector in India also includes skill based games which play a major role in the income of the whole industry. Several online casino in India have also been drastically affected making the industry commercially unviable. In Fact, skill-based gaming firms have been unfairly penalized and prevented from reaching their true capabilities by the government of India.
What does this mean for crypto investors?
Cryptocurrencies are shaken by this kind of digital tax because they face a whooping 30% of tax on their investments. Earnings from cryptocurrency trading will be charged at 30%, involving gifts and transfers of virtual commodities from one account to another controlled by separate persons.
Cryptocurrency traders must now record earnings and losses that cannot be mitigated with other earnings. The administration has established a predetermined 30 percent rate to guarantee that all traders contribute some tax to the government which is a part of their income.
Crypto is heavily invested in many platforms such as the i-gaming industry and this would ultimately mean that even crypto casinos would find it very difficult to raise their business.