Foreign Trade

Multi-lateral Tax Reform

Shabbir Chunawalla

Business is going digital. It may so happen that the business is established in one geography whereas the products are being sold across different geographies. Even contracts are concluded digitally by online contracting. There is digital delivery and new payment norms.

Tax authorities grappled with the problem of shifting base for levying taxes. In October 2021, there is an agreement among 136 countries to address the tax challenges brought about by digital transformation of business.

There is global consensus on the design and implementation of new rules (this is under Pillar 1).

In the meantime, countries like India had already introduced Equalisation Levy (EL) to cover online advertising at the rate of 6 per cent . India widened the scope of EL to cover a broad range of online sales, services and facilitation by non-residents which were subjected to a 2 per cent levy. The expanded EL is complex and poses several challenges to tax payers.

EL has been a temporary levy, pending finalisation of the global consensus. It has been agreed that all existing digital taxes will be removed by December 2023 or the rollout of the multi-lateral agreement whichever is earlier.

Indian collection up to 2022 could be Rs.1600 crore, not significant when compared to direct and indirect tax collections. Besides, EL makes India involved into tax disputes and legal challenges. It is in the interest of India to withdraw EL earlier, which will give a strong message to the global community about India’s commitment to multilateral tax reform. It will facilitate the ease of doing business.

Inverted Duty Structure : IDS

Shabbir Chunawalla

India must correct its import duty structure on Key Industrial Raw Materials (KRMs) which include customs, anti-dumping or safeguard duties. Duties on KRMs must be low and on value added products (VAPs) high. However, in India the KRMs attract high duty and the VAPs low duty. This anomaly is called Inverted Duty Structure (IDS).

High import duty on KRMs closes global sourcing option for the user industry. Expensive KRMs make products expensive. Exports become uncompetitive. As there are low duties on VAPs, the user industry becomes vulnerable.

The cost of producing a KRM is high in India due to high prices of factors of production. Other countries with excess production capacity try to dump subsidised KRMs in India. KRM producers in India seek protection. The govt. responds by introducing antidumping duty. FTAs or free-trade-agreements increase the duty gap between a KRM and corresponding VAP by allowing custom duty free on most VAPs.

If duties are lowered on KRMs, cheap imports will replace large domestic industries.

We have to understand that all KRMs do not need protection from imports.