28 March 2025 : Indian Express Editorial Analysis

 1. A Tax in our interest

(Source – Indian Express, Section – The Editorial Page – Page No. – 12)

Genesis of the Equalisation Levy

• The equalisation levy, a 6% tax on online advertising, was introduced through the Finance Act of 2016 rather than the Income-tax Act.
• This unconventional approach ensured that taxpayers could not claim treaty protection to avoid the levy.
• The primary aim was to counter the low tax rates that major digital corporations were paying globally.
• However, these corporations opposed the tax, as it disrupted their tax-saving strategies.
• Despite criticism, the measure became an example of India’s proactive stance on digital taxation.

International Tax Challenges and India’s Initiative

• The global tax landscape was evolving to address tax avoidance, but consensus on taxing digital companies remained elusive.
• While the OECD’s BEPS initiative explored multiple options, no clear solution emerged.
• India, taking a bold step, became the first country to introduce the equalisation levy. However, this move was seen as a unilateral deviation from international tax norms.
• Critics pointed out issues such as double taxation and additional costs for consumers, yet other nations took inspiration from India’s approach.
• The US, where most major tech companies are headquartered, soon took notice of this shift.

The Struggle for a Global Tax Framework

• As countries negotiated an international tax framework, disputes arose over the share of digital company profits that should be taxed in markets like India.
• The US favored taxing only residual returns, whereas India advocated for a more structured apportionment of profits.
• These conflicting positions created further rifts in negotiations. The OECD attempted to develop a more inclusive proposal, but the process became increasingly complex.
• In 2021, the Joe Biden administration renewed US engagement in global tax discussions, broadening the focus beyond just American tech giants.

India’s Position and the Role of the UN

• India remained committed to the OECD-led negotiations, but economic power dynamics dictated the outcome.
• Despite some support from African nations, India’s influence was limited. As disagreements mounted, developing countries started considering alternative platforms.
• In 2024, the UN received overwhelming backing from 110 nations for an international tax convention.
• The UN tax committee proposed a simpler withholding tax to prevent double taxation. However, just like the OECD’s efforts, consensus remained a major obstacle.
• The UN initiative highlighted that alternative models exist, offering nations more flexibility in protecting their tax interests.

Political Shifts and Trade Tensions

• Despite the continued relevance of digital taxes, political changes in the US reignited tensions.
• In 2020, the US Trade Representative (USTR) investigated India’s expanded equalisation levy, deeming it discriminatory.
• The US responded with threats of retaliatory tariffs, leading India to withdraw the 2% levy.
• With Donald Trump’s return to the presidency, the risk of tariffs resurfaced. The decision to withdraw the 6% equalisation levy may have been influenced by a desire to ease trade tensions with the US.

The Legacy of the Equalisation Levy

• Critics argue that the equalisation levy unfairly targeted specific companies and passed costs onto consumers.
• However, in the absence of profit-based taxation, these criticisms lose weight.
• Any tax can potentially be transferred to consumers, and there is no definitive proof of such an effect.
• The levy generated ₹40 billion in revenue in 2022, demonstrating its effectiveness.
• The timing of its withdrawal is notable, given the lack of a global tax deal.
• While India will no longer benefit from this revenue source, the levy remains a testament to how a developing country can assert its tax rights without waiting for international consensus.

Conclusion

• The withdrawal of India’s equalisation levy marks the end of a bold digital taxation measure that effectively generated revenue but faced international resistance.
• While it highlights India’s ability to implement independent tax policies, the move also underscores the challenges of balancing national interests with global trade and diplomatic pressures.

2. Re-engaging Dhaka

(Source – Indian Express, Section – The Editorial Page – Page No. – 12)

 India’s Diplomatic Success with Bangladesh

• Bangladesh has been one of India’s most significant diplomatic achievements in South Asia, particularly under Sheikh Hasina’s leadership.
• During her tenure, India and Bangladesh deepened economic and security cooperation, tackled cross-border insurgencies, and countered China’s expanding influence in the region.
• However, the political shift in Bangladesh since August last year has complicated India’s strategic position, necessitating a recalibrated approach to maintain strong bilateral ties.
• Despite a congratulatory message from Prime Minister Narendra Modi to Muhammad Yunus, the Chief Advisor to the Interim Government, high-level engagement has remained minimal, highlighting the uncertainty in the relationship.

Growing Engagement with China and Pakistan

• Bangladesh’s evolving foreign policy stance reflects an increasing engagement with both China and Pakistan.
• Even before Hasina’s departure, Bangladesh was strengthening its ties with China by acquiring military equipment, participating in joint military exercises, and joining the Belt and Road Initiative (BRI).
• The trend has intensified, with Yunus recently visiting China and multiple high-level exchanges taking place between Dhaka and Beijing.
• Pakistan, too, has sought closer ties with Bangladesh, evident from intelligence and military delegations exchanged between the two countries.
• The shifting political landscape suggests that Bangladesh’s new leadership aims to reduce dependence on India while enhancing cooperation with regional rivals, a development that India must closely monitor.

India’s Strategic Response

• India needs to increase diplomatic engagement with the Interim Government while recognizing its transitional nature.
• The current administration is merely a placeholder until Bangladesh conducts fresh elections, meaning India must prepare for potential political shifts.
• To secure long-term influence, Delhi should expand its outreach to opposition political parties such as the Bangladesh Nationalist Party (BNP) and the newly formed National Citizen Party, rather than waiting for a government that aligns with its preferences.

Security and Economic Cooperation

• While managing diplomatic realignments, India must also reinforce border security and sustain cooperation on trade, connectivity, and counter-terrorism.
• Strengthening bilateral economic initiatives will ensure that Bangladesh continues to view India as a key partner despite external influences.
• Additionally, addressing the safety of Bangladesh’s Hindu minority is crucial, as incidents affecting minority communities have led to diplomatic strains in the past.

Conclusion:

• India’s relationship with Bangladesh is at a critical juncture. While the political transition in Dhaka presents challenges, it also offers opportunities for India to reinforce its regional position.
• A balanced approach that includes engaging with multiple political stakeholders, maintaining security cooperation, and countering external influences will be key to sustaining India’s influence in Bangladesh in the long run.

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