How Will India's New Digital Tax Impact American Tech Companies?

Reuters reports that last week, India passed 2020-21 budget amendments that included a 2% tax on foreign billings for digital services that will increase compliance headaches for companies like Alphabet (NASDAQ:GOOGL) GOOGL, Facebook (NASDAQ:FB) FB and Amazon AMZN. The tax goes into effect from April 1, i.e. today.

From what could be sussed from people familiar with the matter, business lobbies from India and the U.S. have had discussions, according to which companies are likely to ask for a 6-month window for compliance as they battle with coronavirus-related issues. But neither the companies nor the Finance Ministry of India had any public comments.

India took the first step toward this decision in February, when the government made a provision to tax overseas platforms advertising, streaming, or selling goods and services to an Indian IP address. “The idea is to have an enabling framework in place so that once the OECD framework is ready, we can go ahead,” a senior government official said at the time.

But with the Organisation for Economic Cooperation and Development (OECD) stuck in lengthy debate and large parts of the western world immobilized by the coronavirus, Indian authorities likely think that the timeline will get pushed out. Meanwhile, the virus has enabled these digital companies to generate unprecedented volumes from the country that the government likely wants a share of.

Back in November, India sought changes in the OECD’s proposal saying that it would deny the country its proper share of digital taxation from companies like Google, Facebook, Netflix (NASDAQ:NFLX) NFLX, Alibaba (NYSE:BABA) BABA, Amazon and so on.

As in the case of several European countries, India too is pushing for levy on the basis of place of revenue generation. The OECD proposal to distribute “residual profit,” i.e. profit left after taxation in the place where the company has physical presence was opposed by India.

India has a unique position with respect to the OECD because it is not a member. So a decision by the OECD likely won’t be technically binding for the country. Instead it will depend on one-on-one negotiations between nations, which often haven’t gone in its favor. Its ties with the U.S. have been strained of late as Washington sought to impose tariffs on certain Indian goods.

As far as tech companies are concerned, India is really a huge market with significant prospects. Currency weakness also makes it a place with relatively low operating costs. So India is unlikely to reverse its stand on the tax, especially if the OECD favors a different approach. And tech companies aren’t about to pass up the opportunity. What rate of tax on profit a 2% levy on revenue works out to be isn’t clear though, particularly because a company in massive expansion mode would likely be recording regional losses.

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