2) What do you understand by GAFA tax? Explain the rationale behind devising a separate framework to tax online service providers? Explain how such services are taxed in India and issues arising out of it?(250 words)

Topic – Indian Economy : Issues

2) What do you understand by GAFA tax? Explain the rationale behind devising a separate framework to tax online service providers? Explain how such services are taxed in India and issues arising out of it?(250 words)

Livemint

Why this question

The article discusses a novel issue regarding taxation provisions for online service providers and the challenges involved therein. With online companies like Google, Facebook etc repeatedly coming under the scanner of regulatory authorities, this issue becomes important and needs to be prepared.

Key demand of the question

The question expects us to first explain what GAFA tax is. Next, we need to discuss the reasons why special tax provisions are required for such online service providers. Thereafter, we need to discuss how such services are taxed in India, the issues involved therein and finally give suggestions as to what needs to be done.

Structure of the answer

Introduction – Explain that France recently announced introduction of GAFA tax and explain what it is.

Body

• Discuss the rationale for having separate taxation provisions for such services – 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. What distinguishes technology companies from traditional businesses is user participation in creating value, which, in turn, translates into revenue.
• Explain about similar taxation provisions in India. Finance Act, 2016, accommodated a 6% equalisation levy (EL) in lieu of specified digital services provided to residents in India. However, EL can only be imposed on advertising services. Thereafter, through 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
• Discuss about the issues involved therein such as assessing the value created, difference of opinion between source countries and others etc and how such issues can be resolved.

Conclusion – Explain that this is an important tax revenue for government and discuss the way forward.