This article is written by Shivam Sharma and Deepti Sharma, winners of the Content Writing Competition organized by BusinessWisdomToday.
What are Digital companies?
Digital companies adopt technology to create new value in business models, customer experiences, and the internal capabilities that support their core operations.
It includes both digital-only brands as well as traditional establishments that are converting their companies with digital technologies.
The tax system for digital companies
In recent years, the digitalization of the economy has been a key focus of tax debates.
Political debates have formed on taxing be it physical business operations and/or virtual operations. These debates have intersected in multiple layers of tax pricing including consumption and corporate tax policies.
Novel policies have also been developed including equalization levies and digital service tax alongside. A more common use of gross-based withholding taxes targets the digital service.
However, in some of the losses, political expediency has outpaced consistent policy design. It’s done according to the principle of the tax policy.
Policymakers continue to evaluate the options to tax digital businesses. It will be necessary to avoid creating new distortive tax policies driven by political agreements.
What are digital taxes?
The digital economy means many different things the same is true for digital taxes. In this, digital taxes include politics targeting businesses that provide products or services. It’s done through digital means using a special tax rate or tax base.
This includes policies that extend existing rules to ensure a neutral tax policy toward all businesses. For example, when a country develops its value-added tax to include digital servers. They also cover special corporate tax rules. When a digital company has a permanent establishment even without a physical presence.
Digital companies like Facebook have the unfair benefit of earning income from India without having to pay income tax. That’s why last year, in April, the government of India increased the scope to impose a 2 percent tax on non-resident e-commerce players with a turnover of Rs 2 crore.
Hence, Facebook, Google, and Netflix are the non-resident technology firms. They also need to pay tax in India under new or revised bilateral tax treaties.
The digital companies will come under India’s tax net only. When new ones are signed or when the present treaties get reviewed.
According to Google’s recent filings, the amount of Rs 604 Cr has been paid by Google India as an equalization levy to the Indian tax authorities in the 2020 financial year ending.
Analyzing Digital Taxes
1. Consumption taxes – The consumption taxes are the value-added taxes (VAT) and other taxes on the sale of final goods or services. Countries have been expanding their consumption taxes to include digital goods and services.
2. Digital services taxes – Digital services taxes are gross revenue taxes with a tax base that includes revenue derived from a specific set of digital goods and services or based on the number of digital users within a country.
3. Tax preference for digital business – Tax preference is policies such as research and development (R&D). Credits and patent boxes reduced the tax burden on digital marketing.
Though most of the preferences are available for any business, some specifically lead themselves to digital business models.
The digital tax debate
The growth of the digital economy in recent decades has been paired with policy debates about the taxes digital companies pay and where they pay them.
Many digital business models do not require a physical presence in the countries where they have sales. These companies include social media, an e-commerce marketplace, cloud service, and web-based service platforms that have all the motivated target tax policies. In some cases, the policies are the extension of old rules to new players. On the other hand, other policies are special taxes directed especially at a business platform.
Consumption tax policies have shifted to amount to the growth of products and services delivered through digital means. Businesses often deal in products without a taxable presence within the country.
Policymakers in Digital Tax
Additionally, policymakers are consumed. Policymakers have examined ways to change corporate taxes to capture the activity of digital firms in the countries. It includes a shorter depreciation schedule for intangibles, targeted R&D tax relief, and patent boxes to a certain degree have caused digital firms to benefit from lower taxation.
While the argument behind this preference is to motivate innovation and attract investment in the newest technologies and a lighter tax burden. Resulting from the incentives have created a gap between the taxation of digital business.
In response to the difference in tax burdens, policymakers have sought new taxation tools targeted at some business that is eligible for the target preference because the major digital companies are multinational business, the digital tax discussion has led to the need for an international agreement on whether the rules-based need to change.
Without a multi-internal agreement, individual country policies are likely to intersect or contradict one another resulting in double taxation.
The initiation aims to, make tax administration more effective and easier for taxpayers through the implementation of a fully digital tax system.
The changes outlined in the making taxpayers, which includes
- most business
- self-employed people
- Individual taxpayers.
When will the next changes happen?
Making tax digital has a phased rollout plan which started in early 2016. It includes:
- April 2017 – Private pilot of rollout starts.
- July – December 2017 – Digital tax records determine taxpayers an overview of their liabilities in one place and HRC begins.
- Spring 2018 – Line pilot of making tax digital for VAT begins.
- April 2021 – HMRC no longer accept VAT submission made using the XML facility.
- April 2023 – Making tax digital for income tax self-assessment will be introduced requiring self employees businesses and landlords with annual business or property.
- 2023 onwards – MTD for corporation tax is suspected to be the succeeding phase in the initiation. However, HRC has suggested that MTD for corporation tax rules won’t come into effect until at least 2026.
What are your thoughts on this? Share your views in the comments section.
Authors: Deepti Sharma, Shivam Sharma