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.
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
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
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.
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.
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.
2.The Finance Act, 2018, the Income Tax Act was amended to expand the meaning of
business connection to “significant economic presence”, which includes
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
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
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.