Imposing tariff on digital companies will be counter-productive: Report

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Updated: August 12, 2019 7:04:26 PM

Google Tax: India has adopted several measures like imposing an equalisation levy if the services of these global tech firms are availed by an entity registered in India.

Google Tax, Digital Tax, Facebook, LinkedIn, TwitterGoogle Inc. logo hangs illuminated at the company’s exhibition stand at the Dmexco digital marketing conference in Cologne, Germany. (Bloomberg Photo)

Google Tax: Amid a raging debate over whether to tax global technology giants or not, a new study has warned Asian economies that the move will be fiscally counter-productive. If the aim is to fill the exchequer then these tariffs on digital services will depress the domestic output and the net result for revenue officials will be strongly negative, said a report of the European Centre for International Political Economy (ECIPE), adding that import duties levied on digital goods and services will lead to higher prices and reduced consumption which would in turn slow the GDP growth and shrink the tax revenues.

“Our research indicates that the payoff in tariff revenues would ultimately be minimal relative to the scale of economic damage that would result from import duties on electronic transmissions,” said Hosuk Lee-Makiyama and Badri Narayanan, the authors of the report.

Hosuk Lee-Makiyama is a fellow of the London School of Economics and director of ECIPE and Badri Narayanan is an associate professor at the University of Washington and consultant at McKinsey Global Institute.

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At present, global digital trade is largely free from tariffs as WTO members have agreed to a moratorium in 1998. This moratorium has come to known as WTO E-commerce Moratorium. However, in recent times, several WTO members have debated the issue of imposing tariffs on these digital companies.

India is also mulling to impose tariffs on global technology giants like Google, Facebook, Microsoft, Twitter and several others that have significant economic presence and business interest in the country but operate through the entities registered in low tax jurisdictions such as Ireland. This strategy permits them to avoid paying taxes both on their operations in India and also on the income. Finance minister Nirmala Sitharaman raised the issue at G-20 meeting in Osaka, Japan in June this year.

The report examined four major economies in Asia and Africa – India, China, Indonesia and South Africa. According to the study, each of the four countries tends to lose more in terms of economic and revenue loss than the gains through tariff.

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Impact on India’s GDP & Economy

Assuming a likely scenario in which tariffs imposed by one country lead to widespread reciprocal tariffs then India would lose 49 times more in GDP than it would generate in duty revenues, said the report.

The report concludes that it would be even more damaging for Indonesia, which would lose up to 160 times as much GDP as it would collect in tariffs, while South Africa would lose over 25 times more and China, seven times more.

Impact on Revenues

According to the report, in a scenario where reciprocal tariffs are imposed by other countries, tax revenues loss to India is estimated to be 51 times more than the tariff revenues to be earned by the country. While it is 23 times for Indonesia, 12 times for South Africa and three times for China.

“In short, a tariff on electronic transmissions would prove to be a highly inefficient form of tax collection,” concluded the authors.

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