Digital Taxation – India’s Struggle to tax the import of Electronic Transmissions
-Sri Hari Managalam
INTRODUCTION
While most of the countries around the world struggle to curb the spread of COVID-19 and control the number of fatalities, for developing nations such as India, the fight against the virus is a lot more challenging. The country is making all efforts to control the spread of the disease; however, a limited budget and comparatively outdated Disaster management acts create hindrances in the process. India needs a more constructive approach towards handling the crisis and its after effects; moreover, to fund any and all ‘Covid-19’ related strategies, the country requires new streams of revenue. Taxing foreign digital imports and streaming services in the country is one constructive path that may be favorably pursued. However, for India to come up with new tax regulations, it will have to combat existing determinants, negating the imposition of any such duties. The E- commerce moratorium by the World Trade Organization (“WTO”) on Digital services restricts taxation of digitally traded goods and services to situate a smooth flow of such products across different nations. However, these trade bindings have stopped India and many other developing nations from imposing tax regulations on digitally exported luxury goods, greatly restricting the countries revenues as well as hurting the growth of any domestic digital and streaming services. India, still reeling from the effects of Covid-19, requires newer and effective sources of revenue; where taxing the import of digital services has become a necessity. Accordingly, the aim of this piece is to analyze the intricacies of the World Trade Organization’s moratorium, discuss the tax regulations on other foreign goods and services and formulate a way ahead for the country to increase its revenue streams via the more constructive idea of a digital tax.
WTO’s MORATORIUM
The World Trade Organization’s E- commerce moratorium (“the Moratorium”) allows the trading of electronic transmissions amongst member nations, without the imposition of any additional taxes. The declaration adopted on 20th May 1998, at the second ministerial conference, exempts the imposition of individual custom duties on electronically transmitted services. It was a deferment passed to allow the free trade of digital commodities held in conformity with the ‘member nations’ existing practice of trade exemptions. The WTO’s working pattern does not specifically define electronic transmissions; however, the generally accepted meaning encompasses anything from songs and emails to popular digital streaming services such as Netflix and Amazon. The global arrangement allows member states of the World Trade Organization and the corporations registered with them to deliver their electronic services across continents, without paying any additional duties. For instance, Netflix, a digital streaming service based out of the United States, shares its products with India and Indian nationals pay for its services; however, India is not able to exhort any revenues on these payments as the Moratorium blocks it.
The Moratorium, despite blocking a major revenue stream for many developing nations, has allowed trade over digital transcripts to grow exponentially. The lack of tariffs helped create a new space for digital transmissions which spread across continents. Companies have collaborated with regional organizations to provide digital services, even in the farthest corners of the world. Google, for instance, collaborated with a local service provider in Peru to set up broadband services moving across the Amazon rain forest. The moratorium, unencumbered by a barrage of tax regulations, has formed a new space for human ingenuity to grow and increased global access to digital and electronic media, while situating a new identity for trade over digital pathways.
Despite over eighteen years of its existence, the digital deferment was not a single passage agreement. The Moratorium must be necessarily accepted and extended every two years, at WTO’s biennial Ministerial Conference. The agreement, until now, has successfully been passed at every conference since its inception; last accepted in December of 2019. The members along with approving WTO’s budget for 2020 sanctioned the moratorium till the twelfth Ministerial Conference in Kazakhstan- tentatively planned for June this year. However, a very realistic shift from the agreement is expected in the next conference, where developing nations like India and South Africa are expected to end the long standing tax exemption.
INCONSISTENCIES AND CONTRARIETY
The moratorium over time has allowed digital transmissions to spread across the world; however, the complete lack of tax regulations by countries allowing these digital services to stream through is hurting their individual growth. Developing nations like India and South Africa need as many sources of revenue as possible; the coronavirus has made this feature an obvious fact. Countries like America and the United Kingdom, with surplus budgets for disaster management have handed out relief packages to their nationals worst affected by the virus, but India lacks the resources to do the same. The Centre’s economic stimulus package may be a step in the same direction; however, due to a restricted amount of economic inputs, the nation will not be able to help its citizens at the same level as its first world counterparts. A new stream of taxation revenue; however, may make a significant difference.
According to a research paper by the United Nations Conference on Trade and Development, the removal of the current embargo on taxing digital services can generate up to ten billion dollars in individual taxes, an amount expected to grow exponentially in the near future. Not only will such an amount add to India’s daily surplus, it will help support the country’s Twenty Lakh Crore Economic stimulus package, formed to mitigate the devastating impact of the Corona Virus.
Moreover, the removal of this moratorium will not adversely impact digital exports from developing nations. High bound duties are imposed on many physical inputs of digital transmissions by third world nations; however, the same goods see bound duties as low as 0.2 per cent by developed countries like the United States. This implies that the removal of the moratorium will not adversely impact digital exports from India but will only substantiate a new stream of revenue, one which given the current circumstances, is gravely required.
TARIFF FEATURES AND CORRESPONDING DEVELOPMENTS
The tax rates on import of good in India are covered by the ‘Government of India’ Foreign Trade Development and Regulation Act and a few other individual trade policies. India analyzes its custom impositions on an ad hoc basis and notifies any revisions via the Annual Budget or through Gazette notifications (in case of quarterly emendations). The country has for quite some time followed certain practices and made amendments in its tariff demands, to increase the nation’s cut from foreign imports. India very recently raised taxes on import of goods including but not limited to furniture, toys and electronic items. The step taken by the Finance Minister, though generally argued against as a protectionist measure, seeks to support the country’s various ‘Make in India’ initiatives. India even raised the tax rates on goods like ‘shelled walnuts’ from an early thirty percent to a now towering Hundred percent. The massive increase in tax rates shows the country’s efforts to support domestic corporations; while at the same time also intimates the need for revenue streams. Taxing digital exports, which are essentially luxury goods, qualifies as an equitable solution. Not only will it allow the growth of domestic corporations, it will also provide the government with the much-needed income. The state’s move to exhort higher revenue proceeds via digital transmissions will situate a new space for policy decisions, ensure against losses from an absence of surcharges, and protect the county’s manufacturing industries from any future technological developments like three-dimensional printing. The importance of space for policy decisions and flexibility in revenue streams is evident in times of the Corona Virus pandemic; and a decision to incorporate a new digital tax could not seem more relevant.
CONCLUSION
The Covid-19 induced lockdown in many countries including India has led to an increase in usage of digital transmissions; however, with the moratorium blocking tax impositions, the increment in business has hardly benefitted nation- states. India has been unable to capitalize on the exponential growth of digital services and its corresponding platforms and the trend is likely to continue, unless the moratorium is put to an end. India’s representation at the next Ministerial Conference in Kazakhstan will be to assess the drag the moratorium causes on the growth of developing nations – adversely restricting economic expansion. The World Trade Organization’s moratorium hurts the development and future of young nations like India in support of an inequitable global dynamic, and must-see imperative rescission in the near future.
This Article is authored by Sri Hari Mangalam. Sri Hari is a student of law at the West Bengal National University of Juridical Sciences.