by Druvinka Samuel
With the digital economy taking center stage under lockdown and social distancing conditions, it is becoming ever so important to draw the digital economy into the mainstream. This is necessary, so that proper checks and balances can be developed within a regulatory framework, in order to create a level playing field for both local and foreign players.
Countries such as France, Italy, UK, Malaysia, Spain, etc have taken measures to implement or propose the Digital Services Tax (DST), in order to ensure that large digital companies - most commonly ridesharing and peer-to-peer gig activities - pay adequate corporate taxes to host countries, from where they receive major revenue shares. The Organisation for Economic Co-operation and Development, (OECD) having recognized the necessity to reform international tax laws targeted at large-scale digital companies, has been working on proposals for new legislation but has not yet arrived at a suitable concord. (Taxfoundation.org)
Digital tax in India
In 2016 India emerged as the first country to introduce a digital tax called the ‘Equalisation Levy.’ Initially, the Equalisation Levy was payable by Indian residents on online advertisement services purchased from non-resident companies. However, more recently the reach of the Equalisation Levy was expanded to include a 2% levy on all online sale of goods or services into India by non-resident e-commerce operators.
To break it down further - The levy applies on consideration received by e-commerce operators when it's a:
- Person resident in India, or
- Non-resident, where the:
- Sale of advertising, which targets a customer resident in India, or a customer who accesses the advertising though an IP address located in India; and
- Sale of data, collected from a person who is resident in India or from a person who uses an IP address located in India;
- A person who buys goods or services, or both, using an IP address in India.
Thus, the levy captures online sales of any goods or provision of any services by or through a non-resident e-commerce operator. (BDO Tax News)
Similarly, in a country like ours (Sri Lanka) where we are almost exclusively reliant on foreign relations and investment in order to progress, it is equally important to recognize the importance and impact of the economic bolster provided by local companies.
No level playing field for Sri Lankan digital companies
One key step to ensure this is to concede that as of now, there is no level playing field between International Digital Companies and local industries, businesses and startups. One of the root causes of this is the fact that multinational enterprises operating here, such as Uber are exempt from paying taxes, whereas local enterprises that offer the same service, such as PickMe, are subject to paying taxes.
The Central Bank of Sri Lanka (CBSL), in their 2019 report said that regulatory bodies of countries where worldwide gig platforms operate find it difficult to control them. The primary cause for this, according to CBSL, is these businesses, since they are not registered locally, do not come under the host country’s regulatory environment and taxation system. In contrast, local platforms are under regulatory scrutiny and are liable for local taxes. Such differences are not conducive to ensure a level playing field for local operators. Given that, one may ask why Sri Lanka is yet to take necessary steps to bring about proportion to domiciled and non-domiciled businesses, in order to guarantee the ideal level playing field and equal opportunity?
To tax or not to tax
Recently, the Chartered Institute of Management Accountants (CIMA) held a webinar to discuss digital taxation and both its challenges and benefits. S.W. Pradeep Yasantha speaking on behalf of the Sri Lanka Institute of Taxation said that digital taxing is a problematic area due to the degree of complexity in a digital transaction. Additionally, Jayantha Silva, Chairman of ICTA, when asked whether or not the Information and Communication Technology Agency (ICTA) will recommend taxation of foreign digital service providers, said that ICTA would not encourage DST to come into Sri Lanka as a regional perspective of DST must first be taken in order to evaluate where it stands in digital taxation in Sri Lanka. He continued to say from a policy perspective, Sri Lanka wants to have a long taxation policy and is trying to provide tax concessions to local industries, and aims to help the local industry.
It is important to realize that the longer Sri Lanka’s legislative bodies take to implement a unilateral policy to tax digital companies the way India has with the Equalisation Levy and other countries have with the Digital Services Tax, international players in Sri Lanka will continue to bypass the local regulatory environment through transactions paid via credit cards. By allowing this we are also allowing international operators who have entered Sri Lanka’s markets on several spheres i.e retail, hospitality, transportation, etc, to extract revenue directly to offshore companies. Additionally, we are contributing to the disproportionate playing field on which local businesses have to operate on.
The question begging an answer therefore is — at a time where most countries have turned inward, why haven't we?