Modi – government deserves accolades for making relentless efforts to increase tax revenue – even in the face of slowdown in economic growth [during the first two quarters of the current year, nominal growth in GDP was 8% and 6.1% respectively] – and ensure that it comes close to the target set for the year. The monthly collections under GST [Goods and Services Tax] which had slipped below Rs 100,000 crore mark for three consecutive months viz. August/September/October recovered to over Rs 103,000 crore in November and December each. This is mainly due to reining in evasion, increasing compliance and making businesses pay up [entities filing return increased from 7 million in April, 2019 to 8.1 million in December, 2019]. During December, 2019, collection was up by 16% over December 2018.
From April 1, 2020, the government intends to introduce Electronic Invoice [or E-invoice] for businesses having a turnover of Rs 100 crore or more [this will be preceded by trial on voluntary basis from January 1, 2020 for businesses having turnover Rs 500 crore or more and from February 1, 2020, for entities with turnover > Rs 100 crore]. E-invoice is a system in which “Business to Business” (B2B) invoices are authenticated electronically by GST Network [GSTN] for further use on common GST portal. Under the proposed system, an identification number will be issued against every invoice by the Invoice Registration Portal [IRP] to be managed by the GSTN.
This will enable matching of each and every transaction on real time basis, ensure that no transaction escapes payment of tax and fake input tax credits [refund that suppliers claim in respect of tax paid by them on purchase of inputs] are eliminated. It will help firms get their tax refunds on real time basis [against the current situation wherein these are held up for several months as only a small percentage is released till all invoices are compared] besides substantially improving the ease of doing business. Considering that at present revenue leakage is huge [Rs 45,500 crore since roll of the tax reform on July 1, 2017 – according to a statement by the minister of state for finance, Anurag Thakur and could be much higher at over Rs 100,000 crore as per finance minister, West Bengal, Dr Amit Mitra], E-invoice will help increase revenue by leaps and bounds.
The government has also thrown enough hints in regard to simplifying the existing structure of GST by reducing the number of tax slabs [at present, besides the exempt category, there are four viz. 5%, 12%, 18% and 28%] and introducing simpler return filing. However, the precise timing of this restructuring will depend on how the revenue pans out in the next few years.
The government has taken innovative steps such as the ‘Sabka Vishwas’ scheme [launched on September 1, 2019, the scheme seeks to settle still-unresolved disputes relating to excise and service tax under the erstwhile dispensation prior to GST and provides for relief varying from 40% to 70% of tax dues for cases other than voluntary disclosure cases depending on the amount of dues] under which it has garnered Rs 31,000 crore from 134,000 cases out of a total of 183,000 as on September 1, 2019. More is expected to flow into the coffers as the remaining 49,000 come forward to settle.
Another area where the income-tax [IT] department is making efforts relates to making those who deposited black cash post-demonetization pay up tax, penalty and interest. The department has sent notices to over 500 jewelers who had deposited more than Rs 100 crore each [the latter indulged in laundering of black money by selling gold and jewelry to hoarders of banned currency notes at huge premium; a big slice of these transactions were made in ‘back-date’ to lend them some degree of legitimacy]. This will help garner thousands of crore.
Yet another area relates to taxation of multinational corporations [MNCs]. By nature, operations of MNCs are transnational with entities located in several countries involving a high level of interdependence and cross-border flows of goods and services between them as also direct supplies to lakhs of retailers and millions of consumers. For global technology companies in the internet space viz. Google, Face book, Amazon etc, doing business in digital mode, physical boundaries get blurred. They structure their investment arms through a maze of subsidiaries held outside India in low tax jurisdictions such as Singapore, Mauritius, Ireland etc.
These technology giants invoice Indian customers [both businesses and consumers] via these offshore entities despite having significant revenue, users or paying customers in India even as their Indian entity is structured more like a service company or commission agent to the parent company located abroad. As a result, an overwhelming share of revenues is reported in the parent company [registered in tax haven] while a very small portion of service/commission revenue and income is reported in the entity registered in India.
This skulduggery [read: meager revenue reported in India despite generation of bulk of their revenue from here] is made possible not just due to digital character of their transactions but more so, because under Indian law, the concept of permanent establishment [PE] is not defined. PE refers to a fixed place of business normally located in the territory of the source country [read: India] from where the foreign enterprise conducts transactions. It is a concept that determines which jurisdiction has the right to tax a firm’s revenue.
The global tech giants that do not have a permanent establishment [PE] in India pay tax @ 10% on their revenue [as against a much higher rate of 35% applicable to Indian startups that are set up in India]. This results in huge savings in tax paid in India due to not just less/meager revenue recorded here but also, a lower tax rate of 10% applicable to service centre/commission agent.
Two years ago, a committee set up by Central Board of Direct Taxes [CBDT] came up with a draft report proposing rules for taxing profits of companies with significant economic presence [SEP] locally. In Finance Act 2018, the government proposed that such offshore firms should be taxed in India if they have a market presence above a threshold to be defined in terms of their customer base and revenue. However, this needs an amendment to India’s tax treaties.
Meanwhile, under the so called base erosion profit shifting [BEPS] framework agreement, the Organization for Economic Cooperation and Development [OECD] released on October 9, 2019 a draft on taxing digital companies. It endorses India’s approach that profits of MNCs should be available for taxation in the country where their customers are, irrespective of any physical presence in that market and that a formula should be evolved for such taxation. However, on a determination as to how much profit should be taxed locally, India has reservations and accordingly, sought changes in the proposal.
Even as OECD plan for the new approach to taxation of MNCs will take time to become a reality [as all participating countries need to amend all bilateral tax treaties of the signatory nations], India needs to get ready with a broad-based definition of significant economic presence [SEP] to include ‘digital permanent establishment’ [DPE]. The government may consider a three-fold criteria for treating a foreign company as DPE to include number of users, paying customers or annual revenue. A global tech giant that has say a million users, 100 paying customers or annual revenue of Rs 100 million locally should be considered as having DPE and taxed on par with domestic companies. It should nudge OECD into accepting such a proposition.
Considering exponential growth in digital transactions and in particular, e-commerce which will constitute an increasing share of India’s GDP, the government can’t afford to delay collecting its legitimate tax dues from global technology companies in the internet space.
To sum up, in an interdependent world wherein global corporations are deriving a good slice of their income from their operations in India – irrespective of whether they have physical presence in its territory or not – the Indian government has every right to tax such income. The tax rate may be at par with the rate applicable to large Indian companies and subsidiaries of foreign enterprises.
Together with efforts to substantially augment tax collection by rationalizing and restructuring GST and direct tax regime, besides use of technology [in particular, techniques such as artificial intelligence, data analytics] and innovative schemes to settle tax disputes, it should be possible to increase tax buoyancy to a level consistent with US$ 5 trillion economy.