An attempt was made by some European countries including France and Britain to overhaul the global tax system for digital giants,under the auspices of Organization for Economic Cooperation and Development (OECD). Recently, US pulled out of negotiations aimed at establishing a global framework of fair digital tax regime.

What is GAFA Tax?

GAFA Tax is named after Google, Apple, Facebook and Amazon – the large technology and internet companies. France became the first major economy to impose a tax on digital giants. France had passed a legislation that would levy a 3% tax on total annual revenues of the largest tech firms providing services to French consumers.

Need for GAFA Tax

The reason for creating a different system for taxing internet service providers is as follows:

  • The existing tax norms were framed keeping in view the conventional brick and mortar business models and therefore, is not adequate to regulate the online services that have sprung up quite recently.
  • Digital economy is characterised by a unique system of value creation resulting from multiple factors like sales functions, algorithms and personal information of users.
  • One important factor that distinguishes technology companies from conventional businesses is user participation in creating value, which, in turn, translates into revenue. Digital businesses' unique ability to analyse big data gathered by constant user engagement and data mining lies in their ability.
  • Value attributable to the users: The tech giants raise a sizeable revenue from what is known as “the value attributable to the user in the source country”. Ride-for-hire companies like Uber, for example, use user data as inputs to improve their surge pricing algorithms. This algorithm helps these companies to determine the maximum fare a customer will be willing to pay in real time, based on passenger demand and driver availability. In the absence of personal information (of users in a source country) the difference in revenue created between what Uber would have ended up charging a user and what it ends up charging the user is the profit attributed to the user in the source country. At present, entities in most jurisdictions are not taxed in the source country for the revenue generated with the help of this value produced.
  • Countries in favour of GAFA Tax: Major technology firms in countries like France and Britain have come under the scrutiny of lawmakers for potentially routing income from activities in countries with relatively low tax rates or other arrangements.

GAFA tax was introduced to combat attempts by the firms to avoid paying what is considered a “fair share” of taxes, by taking advantage of the prevailing tax norms in the country.

France, Britain, Italy and Spain have expressed their desire to agree on a fair digital tax at the level of OECD.

Challenges in devising a global tax system for digital giants

  • The US pulled out of the negotiations as it believes that the digital services tax unfairly targets American companies.
  • A major challenge is that the assessment of value of user contribution in the source country is subjective. Thus, the source country government will often try to argue that the value of the consumer contribution that has converted into the revenue of the entity is much more than what the state in which the entity is formed will say. This might create friction and undermine the efficacy of double taxation agreements.
  • OECD acknowledges the need to tax value at its source and identified how value is created. Yet, it has not been able to devise a definite method of assessing the value that users generate in a source country. Lack of consensus on quantifying user contribution and differences in the interests of developed (residence) and developing (source) countries have furthered the delay in devising the global tax system for digital giants.

Indian Scenario

The Equalisation Levy introduced by the Finance Act 2016, was charged at 6% on certain online advertising and related services. The Finance Act 2020 amended the Finance Act 2016, introducing a new Equalisation Levy at 2% on the consideration received/receivable by an e-commerce operator from the following transactions (e-commerce supply or services):

  • Online sale of goods owned by the e-commerce operator; or
  • Online provision of services provided by the e-commerce; or
  • Online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
  • Any combination of the above-mentioned activities

The levy is applicable on consideration received by the e-commerce operator on the above transactions from a:

  • Person resident in India
  • Non-resident, where the:
    1. Sale of advertising, which targets a customer who is resident in India, or a customer who accesses the advertising though an IP address located in India; and
    2. Sale of data, collected from a person who is resident in India or from a person who uses an IP address located in India
    3. Person who buys goods or services, or both, uses an IP address located in India.

Thus, the levy captures online sales of any goods or provision of any services by or through a non-resident e-commerce operator

Major tech giants across the globe have expressed their concerns over the new levy, remarking that the effective time window for them to comply with the new levy is too short. Many have also expressed concern that their systems would need to keep track of IP addresses, and their invoicing systems may require considerable overhaul. Considering the current situation and the limited window for compliance, several representations have been made to defer the implementation of the levy.