G7’s tax proposal may dismay India

The G7 big industrial nations agreed last week on a 15% minimum global corporate levy and the right to tax firms based on where they generate revenue. Big emerging economies such as India get their say at July’s G20 meeting. The deal may look stingy to New Delhi, which already imposes a levy on digital giants. That tax is based on sales and set at 2% on e-commerce goods and services revenue above 20-million rupees. By comparison, KPMG believes about $900m is the bottom of the range of what could be suggested when the G7’s proposal is fleshed out. And while India’s rules allow it to go after a dizzying number of multinationals, the plan could cover as few as 100 and exclude multiple sectors.

The G7 proposals largely sidestep a debate over who has the right to tax digital behemoths. These mainly US giants generate local revenue with minimal physical presence and hence pay little tax locally. But the proposed new taxing right changes little. A 2020 Organisation for Economic Co-operation and Development (OECD) analysis found that a similar plan would raise a meagre $5bn$12bn worldwide. One solution may be to tax companies based on revenue or customers, which would suit India, where Facebook has more than 400-million users. It would be closer to what some rich nations advocated; they accepted the digital-tax fudge perhaps because they gain from the broader package. The Tax Justice Network says 60% of revenue from a similar OECD plan would go to G7 nations.

India and other big emerging economies might sign up to the G7 plan in the spirit of global co-operation. But short-changed governments have a strong incentive to continuously push for exemptions and find creative ways to get their dues. The size of its population and its relative openness to foreign companies, put India in pole position to lead any resistance.