G20’s Digital Tax Plan to Impact India’s Domestic Tax Environment
The G20 leaders’ recent endorsement of a multilateral agreement on Base Erosion and Profit Shifting (BEPS) in October 2021 is set to have far-reaching implications for India’s domestic tax environment. This plan aims to address the challenges posed by a digitalized global economy, outlining two pillars: reallocation of residual profits of large multinational enterprises (MNEs) and a global minimum tax.
Pillars of the Plan
Pillar One: Reallocation of Residual Profits
Pillar One seeks to redistribute part of MNEs’ residual profits to “market countries” even in the absence of physical presence. This means that India will need to reallocate a portion of the profits earned by multinational companies operating in the country, regardless of whether they have a physical presence or not.
Pillar Two: Global Minimum Tax Rate
Pillar Two imposes a global minimum tax rate of 15% on MNEs operating in every jurisdiction. This means that all multinational companies will be required to pay a minimum tax rate of 15%, regardless of where they operate in the world.
Implementation Challenges
The implementation process is likely to face complexities, with the OECD Secretary General hinting at potential delays until 2024. In India, the ratification of the convention and enactment of legislation will require significant administrative resources, including:
- Allocation of additional staff
- Training programs for tax officials
- Updates to existing tax laws and regulations
Aligning Tax Policy with ESG Goals
Tax policy in India will need to be aligned with the Environment, Social, and Governance (ESG) agenda. As India targets net zero emissions by 2070 and aims to achieve several ambitious objectives by 2030, tax reforms such as:
- Environmental taxes
- Targeted incentives
will be crucial. The government must also ensure that businesses commit to India’s ESG goals through reporting and disclosure requirements.
Importance of Mandatory Standards and Greenwashing Prevention
The lack of mandatory standards and instances of greenwashing have highlighted the need for reliable mechanisms to incentivize organizational behavior towards adoption of ESG factors. Tax policy reforms, while ensuring a sustainable revenue stream, should pave the way for achieving Sustainable Development Goals (SDGs) planned by India in its journey towards a $5 trillion economy.
Conclusion
In conclusion, the G20’s digital tax plan will have significant implications for India’s domestic tax environment, requiring careful planning and implementation to ensure a smooth transition. As the government navigates these changes, it must also prioritize alignment with ESG goals and proactively adapt to the dynamically changing global landscape.