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GAFA Taxation System: An Introduction

French Finance minister Bruno Le Maire had recently announced the introduction of a GAFA tax— named after Google, Apple, Facebook, Amazon—on large technology and internet companies in France from 1 January 2019. These internet giants will now pay taxes to the government based on the services they provide. This has happened for the first time in the world.[1]

What distinguishes technology companies from traditional businesses is user participation in creating value, which, in turn, translates into revenue.

Although using consumer data to improve businesses is not exclusive to the digital economy, the unique ability of digital businesses lies in their power to analyze big data collected via constant user interaction and data mining. Therefore, it becomes a taxable commodity as per the recent anazlyzation of the government.

Why Needed?
1.The rationale behind devising a separate framework to tax online service providers is that;
2.Existing tax norms that are framed envisaging brick and mortar business models are NOT SUITABLE to regulate online services.
3.This is because the digital economy is characterized by a unique system of VALUE CREATION resulting from a combination of factors such as sales functions, algorithms and personal information of users.
4.The low tax rates paid by US tech giants in Europe has repeatedly caused anger among voters in many European countries but the 28-member bloc is divided on how to tackle the issue.
5.Ireland, which hosts the European headquarters of several US tech giants, leads a small group of otherwise mostly Nordic countries that argue a new tax could lead to reprisals against European companies and stoke anger in the US.
6.Any tax changes must be approved unanimously by member states.
7. France’s move to introduce the tax on January 1 could be driven by domestic budget concerns, with the finance ministry looking for new sources of revenues and savings.
8. Under pressure from “yellow vest” protesters, President Emmanuel Macron announced a series of measures last week for low-income families which has left a multi-billion- euro hole in the 2019 .budget.[2]
9. Some other EU member states such as Britain, Spain and Italy are also working on national versions of a digital tax, with Singapore and India also planning their own schemes.
10. The yellow vests movement or yellow jackets movement is a populist, grassroots political movement for economic justice.
11. The movement is motivated by rising fuel prices, high cost of living, and claims that a disproportionate burden of the government's tax reforms were falling on the working and middle classes.

Indian Perspective:
The need for India to consider the adoption of an accurate methodology to assess value created in India through user contributions so that digital service providers in India can be taxed more effectively.

Following shows the present Indian Scenario:
1.The Finance Act, 2016, accommodated a 6% equalization levy (EL) in lieu of specified digital services provided to residents in India. However, EL can only be imposed on advertising services.[3]
2.The Finance Act, 2018, the Income Tax Act was amended to expand the meaning of business connection to “significant economic presence”, which includes digital services.
3.It defines any entity that have significant economic presence in India if it It provides data or software in India exceeding a payment threshold (yet to be notified) or
4.It engages in systematic and continuous solicitation of business activities to a prescribed number of users digitally.

Issues In General
OECD has been unable to devise a definite method of assessing the value that users generate in a source country.
Due to this anomaly, the GAFA tax and other proposals floated in the EU, UK and France impose an approximate digital tax of 3% on the revenue generated by entities that operate in the digital economy above a certain threshold.

This resulted mostly from the slow ongoing process of quantifying user contribution and political pressure to resist further delay of taxing these entities.
The lack of consensus is exacerbated due to a difference in the interests of developed (residence) countries and developing (source) countries.
For example, countries like France have suggested imposing such an interim tax only on high profit big-tech businesses like Google and Amazon, making net valuation the metric for determining threshold
It creates greater friction between the government of the source country and where the entities are established and thereby undermine the efficacy of double taxation agreements.
It is imperative, therefore, that policymakers deliberate upon the possibility and feasibility of adopting a methodology to assess value creation objectively to tax digital players more effectively in the source country.


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