Make tech majors pay their fair share, lower rates for domestic companies

G7 countries’ agreeing to a global minimum corporate tax rate of 15% and the rule that MNCs, irrespective of the nature of their business, have to pay taxes where they operate, are pathbreaking proposals. They put on notice both tax havens, a list that includes countries like Ireland and China’s Hong Kong, as well as global technology behemoths like Google’s parent Alphabet, Facebook and Amazon. These MNCs, in part taking advantage of businesses built on digital platforms, create a maze of subsidiaries and park most of their revenues in tax havens, denying governments of major markets taxes and putting companies which duly pay taxes at a great disadvantage.

G7’s agreement should be followed through quickly by, first, G20’s agreement and, second, framing the rules of the new system. G20 members should persuade China, which may be concerned about Hong Kong, that it will gain far more than it will lose under the new system. India, a G7 invitee and a G20 member, of course has much to gain. As one of the world’s largest internet markets by size, and one in which the average  value of transactions will go up rapidly, India loses out badly when these technology MNCs escape the corporate tax net. Taxes like the equalisation levy and the concept of ‘Significant Economic Presence’ introduced in IT rules are correct steps, but they don’t compensate for revenue lost under the current regime.

India should boldly undertake another corporate tax reform – lower domestic rates significantly. In fact, India’s rate for taxing companies should be the global minimum – 15%. In September 2019, GoI had slashed corporate taxes to 22% in general and to 15% for greenfield manufacturing companies. With cess and surcharge, the effective tax rate for existing domestic corporates is roughly 25.17%. But covid has radically changed ground realities. Private investment, slowing down even before the pandemic, needs a huge incentive. Any loss in revenue will be more than made up by taxes on activities generated by higher private investment. A 15% corporate tax rate will make India the most attractive tax-wise in Asia. Such a rate will also compensate for India’s  disadvantages vis-à-vis its peers – higher business compliance costs, poorer infrastructure, slower legal system. Along with current incentives for manufacturing like the PLI scheme, a 15% rate has the potential to make this country a manufacturing giant. Let’s remember, sustained private investment and industrial employment are the only sure shot means to make India richer.


This piece appeared as an editorial opinion in the print edition of The Times of India.


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