Shreesh Chadha
Shared Economy is essentially an economic model that facilitates sharing of goods and services over an online platform. [1]It may exist in two forms- a commercial model which allows customers and suppliers to get in touch to obtain goods and services ( Uber and Airbnb), and a charity model in which goods and services are provided for free or subscription or people are put directly in touch with the beneficiaries of such a model (Ketto). In commercial models however, such as Airbnb the goods are not shared, but rented, so shared economy is more of a business ideology than an economic model.[2]
There are several criticisms of a Shared Economy such as the conventional argument of lack of regulation. Unlicensed individuals such as drivers or homeowners, providing services are not regulated by the government, so the quality of services may dwindle. Also, the lack of regulation means that registration fees etc. with the relevant authorities is not paid and therefore, these unlicensed suppliers can afford to render services and goods at comparatively low prices. Other criticisms may include unstable income, lack of benefits to suppliers etc. [3]
The focus of this article is however-criticism on the tax front.
Firstly, the whole structure of online platforms such as Uber and Airbnb follows a Double Irish or Dutch Sandwich structure which is specifically designed for avoiding taxes in host countries. The total fare of a ride is credited to the Dutch company Uber B.V. (as given in the receipt given to us as riders), another Dutch subsidiary by the name of Raiser B.V. collects the fare electronically and gives 80% of the fare to the driver availing Uber to earn money by rendering services. Since the revenue is transferred online, there is no revenue generation in the host country (where the ride is being taken). Uber International C.V. is another Dutch company which sends royalty payments out of the 20% retained by Uber after paying the driver (subject to admin expenses etc.) to the US office under the guise of an Intangible Property License Agreement. Royalty payments are not taxed in Netherlands, so the 20% earned by Uber is not taxed in the US as it is earned in Netherlands, or Netherlands or in the host country. Therefore, because of the transfer of revenue, and the licensing agreement with another Dutch company, Uber pays no tax in the host country[4].
A similar system is followed by Airbnb, where the parent company is housed in Ireland (where there is favorable corporate tax regime), and all the income Airbnb earns through commissions from hosts is transferred here. In India however, the GST liability is shifted to the homeowners who have registered themselves on the app. For GSTIN registered homeowners, the GST is paid according to their tariff by them only, for homeowners unregistered under the GST scheme Airbnb, collects the tax from the consumer and pays it to the authorities. The rate of taxes is decided by the Government according to the per unit per night charges:
Below 1,000 INR: Exempt
1,000 INR — 2,499 INR: 12%
2,500 INR — 7,499 INR: 18%
7,500 INR and above: 28%
Secondly, the benefit of a shared economy business model such as Uber or Airbnb, is that it enables individuals to earn extra income from unused goods. A driver can register himself on Uber and use it as an online platform to get rides and earn money from the same after paying a small portion (20%) to Uber. As far as the income of the driver is concerned, the tax liability is shifted from Uber on the driver as he is not an employee but an independent contractor. [5] This driver will still have to meet all the qualifications of tax computations ( tax slab etc.) This system was the subject of litigation in India involving the Indian wing of Uber- Uber India which shirked it’s responsibility as being only a facilitator for the Dutch company in India and not liable for deducting tax (according to S. 194C, Income Tax Act,1961) on it’s drivers as they are not employees, but driver partners and independent contractors. The tax demand was however stayed by the ITAT, Mumbai.[6]
This conundrum is even more pronounced when it comes to Airbnb as the house-provider who lists himself on the app. Even though this person is again an independent contractor and bears the burden of the taxes, there is still confusion as to whether his rental income will be treated as income from house property (S. 22, Income Tax Act 1961) or as business income (S. 29, Income Tax Act 1961) in which the latter is subject to deductions etc. The Supreme Court of India has settled this conundrum to an extent wherein they have said that any rent from letting out property is usually income from house property, but if letting out properties is itself the business of the assessee then it can be business income. [7]Although, Airbnb has resolved this problem to an extent, this interpretation leaves a lacuna as far as those assesses are concerned who are salaried employees, but lease out an extra room of their house periodically since they have no use of that room. Therefore, shared economies result in uncertainty of who and how to tax the users of such apps.
To tackle these problems certain unilateral measures have been taken by the government as listed below:
The advent of the larger phenomenon of digital economy and shared economy within it, have resulted in challenges in taxation based on traditional tax laws in countries. To counter this OECD came up with the Base Erosion and Profit Sharing Action Plans in 2015, which was adopted by India.
To tackle the problem created by the Rights Florists case[8], which was essentially that a physical presence is required in India for the Permanent Establishment test to be met, without which the income in the hands of a non-resident cannot be taxed, the focus was shifted to Significant Economic Presence (SEP) in India. Therefore, in the absence of an actual physical office, if significant economic presence can be established through the activities of the online platform and it’s interaction with the economy of the assessing state. India implemented this new doctrine through the Finance Act 2018 which amended S. 9 of the Income Tax Act, 1961 to bring into tax purview a non-resident if a transaction is entered into with regards to any goods and services which might include download of software etc. if the prescribed payment thresholds are met. This definition of business connection based on significant economic presence also extends to any soliciting, advertising which constitutes as interaction with users in the assessing state. Even though this is a welcome move, as the traditional definition of permanent establishment cannot persist in a virtual world and base erosion needs to be tackled, it does not come without its woes. Since, it is a provision in the Income Tax Act,1961 it is subject to all the international treaties. India has moreover, reserved it’s right to define Permanent Establishment according to the amended S. 9 in international treaties (Article 5). Thus, one criticism can be that it will be hard for India to have their meaning of SEP as the accepted meaning in all of it’s international treaties, and in case of a conflict the prevailing meaning of PE as given in the treaty would apply. Therefore, without the acceptance of the OECD model of SEP as taken by India in equally wide purports, SEP cannot be the functioning norm governing international tax treaties of India. Also, the wording of the amended section “any goods and services”, “any transaction”, “continuous solicitation” etc. [9]need to be clearly defined and differentiated.
A more robust and overriding system of taxing online platforms such as Google, Facebook for their fees for advertising services is the Equalization Levy. This is not in the Income Tax Act and is a standalone provision, therefore it is omnipresent. In this case 6% of the amount paid as consideration to Google, Facebook (if more than Rs. 1 Lakh in an year), shall be deducted by the resident/ NR having PE. A general criticism of this system is, that there is nothing stopping the online platforms from raising their prices and shifting the ultimate tax burden on the entity availing advertising services, which is a resident. So the idea of preventing wrongful gain can be circumvented.
To tax online platforms such as Google, Facebook (which also earn Income through advertising services from businesses in India), the RBI came up with a circular which mandated the provision of a local server under the guise of data protection of the individuals accessing such a platform. What this would do is that the online entity, which had no Permanent Establishment in India could be taxed as the local server could amount to one. Since the idea of permanent establishment is evolving from a traditional meaning of brick and mortar building, a local server which constitutes as essential business activity could result in effective taxation of these online platforms.[10]
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[1] Hamari, Juho; Sjöklint, Mimmi; Ukkonen, Antti (2016). “The Sharing Economy: Why People Participate in Collaborative Consumption”. Journal of the Association for Information Science and Technology. 67
[2] Tuttle, Brad (June 30, 2014). “Can We Stop Pretending the Sharing Economy Is All About Sharing?”
[3] https://www.eu-startups.com/2019/02/the-ever-growing-sharing-economy-pros-and-cons/
[4] https://medium.com/dconstrct/how-uber-google-facebook-and-other-tech-giants-avoid-paying-billions-in-tax-365b7c8b7dbc
[5] http://fortune.com/2015/10/22/uber-tax-shell/
[6] https://economictimes.indiatimes.com/news/economy/policy/itat-gives-partial-reprieve-to-uber-in-tax-demand-case/articleshow/66155341.cms
[7] Raj Dadarkar and Associates v. Assistant Commissioner of Income Tax [2017] 394 ITR 592
[8] ITO vs Right Florist Pvt. Ltd [TS-6658-ITAT-2013(Kolkata)-O]
[9] S. 9, Exp 2-A, Income Tax Act,1961.
[10] https://economictimes.indiatimes.com/news/economy/policy/localisation-heat-data-bank-here-may-help-government-debit-taxes/articleshow/67120911.cms
