View: Should India sign up to the global tax deal

Recently, India re-affirmed its commitment to the OECD/G20 Inclusive Framework deal, along with 132 other countries, to address the tax challenges arising from the digitalization of the economy. Its claim that market jurisdictions deserve a right to tax a portion of the profits of a MNC has largely been accepted, with key details being negotiated currently. Along with other G24 nations, it also flagged that the allocation of taxes under the global deal should be meaningful.
While tax collection is an important factor, tax policies and actions by tax authorities geared solely towards revenue collection have shown their pitfalls in recent days. The Government has had to roll back the retrospective application of indirect transfer taxes in the aftermath of favourable rulings obtained by Cairn. Further, policy goals of revenue collection should be assessed against the larger context of the Indian budget and revenue requirements. For instance, Mr. Tarun Bajaj, Revenue Secretary, stated recently that when India has a budget of more than Rs 30 lakh crores, an amount of Rs 5,000-10,000 crore is not that important. The fact that India collected close to Rs 2,000 crore in the last financial year through the equalisation levy should factor in the assessment between accepting the global deal versus continuing the unilateral equalization levy. In any event, Mr. Tarun Bajaj pointed out that India is not necessarily bound to lose revenue by signing up to the deal provided certain percentages of the profits is taxable by market countries.

In any event, there are larger tax policy goals that can be achieved by signing up to the deal. Mr. Rasmi Ranjan Das, Joint Secretary in Ministry of Finance and the Indian Delegate to the discussions at the OECD, has noted that apart from revenue, modernizing the international tax system is also the primary goal of the ongoing global discussions. The days of bilateral tax treaties may be past and despite its flaws or the politics, multilateralism appears to be the way forward. Continuing with unilateral measures turns the clock back, creates complexity and uncertainty due to varied scope and application of unilateral levies imposed by different governments.

Taking a forward-looking view, Indian startups and SAAS companies are going increasingly global, meaning India is no longer only an importer of digital services or goods but is also an exporter where Indian companies do business around the world without a physical or taxable presence. It is estimated that Indian SAAS companies will rake in USD 18-20 billion in revenues by 2022 and that the industry can reach a value of over USD 1 trillion by 2030. It was also reported that MXTakaTak became the number one app in Asia beating other global social media platforms. It was in the top 10 most downloaded apps globally across Google Play and Apple store. The impact on such start ups and upcoming unicorns in the edtech such as Byjus which is looking at USD 3 billion in revenues from the US or with increasing returns from rest of the world, should also be factored in the decision making keeping a long term view. The focus should therefore be on a stable tax policy regime that accounts for this change in position. If the framework falls apart due to lack of a consensus, unilateral levies may proliferate increasing severely impacting ease of doing business and disproportionately increasing tax costs for Indian unicorns with global user bases.

Unilateral levies also invite retaliatory unilateral measures which also impact cross border trade, increase costs and decrease consumer welfare. It is important to note that US not only the largest trade partner but is also the only country that India has a trade surplus amongst the top 10 countries that India trades with. The US has announced trade sanctions against India which have been suspended temporarily. India’s withdrawal at this stage may result in trade wars which may significantly impact the more than USD 20 Billion trade surplus India gains through trading with US. The significance of India-US trade was again reiterated at the recent meeting between Prime Minister Modi and President Joe Biden.

In addition, tax certainty through a global deal would also boost investor confidence. The importance of foreign direct investment and the role it could play in the recovery of the Indian economy was reiterated in the indirect transfer tax rollback amendment bill. According to the report “Tax, Trade and Investments: An Indian Policy Perspective, 2021”, the costs of not signing up to the global deal could be greater.

(N Meyyappan is Partner, International Tax at Nitish Desai Associates.)