Mundle Venkatraman & Associates

GAFA Tax – Trapping the Tech Giants

By: Mr. Harshit Mogra - 28th December, 2020

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What is GAFA?

GAFA is an acronym used to denote the firms which are being taxed under this tax levy. GAFA stands for Google, Apple, Facebook and Amazon. This digital tax is levied on the large technology and internet companies. France was the first country to introduce this tax in January 2019. Now around 137 countries are negotiating over how to tax the tech-giants under the guidance of OECD (Organization for Economic Co-operation and Development).

The Need for GAFA Tax in India

The aim of this tax levy is to level the playing field for local companies which pay corporate tax at the rate of 35%.
It also aims to ensure that subsidiaries of the tech giants registered in countries with lower tax rates, pay taxes on the profits earned from India.
Existing tax norms, which were formed considering old business model of bricks and mortar, are not suitable to regulate online business.
The Tech-giants have a complex corporate structure, by setting up several companies in different countries, they derive large revenue and by shifting the profits to lower tax paying countries, reduce their tax liability.

GAFA in India - Equalization Levy

As of 2020, there are around 700 million internet users in India, making it the country with second largest online users in the world. Hence the revenue generated by the digital businesses is very huge, and thus they cannot be overlooked from point of view of tax revenue.

There is no tax such as GAFA in India, instead its equivalent is the Equalization Levy. This has been imposed in the Finance Act, 2016. In which there is a charge of 6% payable on the gross revenue of more than Rs. 550 Crores, derived from advertising services provided to residents of India.

In 2018-19 government proposed amendment of the income tax act to include the digital tax with significant user base or having significant presence in India. In the new amendment, effective from 1^st April 2020, equalization levy has been expanded from online advertising to almost all online commercial activities, at the rate of 2% on all revenue, done by businesses not having taxable presence in India.

It is levied on consideration receivable by the e-commerce operator for supply or services or facilitation of supply or service to – Person resident in India, Non-resident under specified circumstances such as through sale of data collected from a person resident in India, and Person who buys goods or services through an IP address located in India.

The concept of Significant presence in India includes the following: -

Advertisements which are targeted towards Indian residents or those who access advertisements with an Indian internet protocol (IP) address.
Sale of such data which is collected from an Indian resident or who uses an Indian IP address.
Sale of goods or services based on the data collected from an Indian resident or who uses an Indian IP address.

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