This blog was written by one of the students who joined the WageIndicator Gig team during their Internship Program. The internship also allows the interns to contribute to the news collection and create visuals to give an overview of different platform economy topics.
Author: Mohammed Anfas K
The advent of gig platforms has ushered in a new era of opportunities and challenges for tax systems worldwide. The intermediary and cross-border nature of these platforms, coupled with the classification of gig workers as independent contractors, have made the traditional tax mechanisms inadequate. This blog explores the intricacies of taxing gig platforms’ transactions and workers, with a focus on the recent notification sent by the Directorate General of GST Intelligence (DGGI) to major food delivery platforms, namely Swiggy and Zomato, in India.
Taxing Gig Platforms: Prospects and Challenges
Gig platforms are both a source of hope and a challenge in terms of taxation. The formalisation of work through these platforms offers the potential to improve tax collection by providing ample data for efficient identification and collection. For instance, services like domestic cleaning and food delivery, previously hidden in the informal market, yielded significant untaxed income. Now, with platforms formalising payments, these earnings are transparent, offering tax agencies a substantial opportunity for improved collection. Therefore, many countries, including India, utilise gig platforms as tax collection agents. However, challenges arise due to the lack of a regulatory framework, leading to non-compliance by both platforms and workers.
The advent of gig platforms has brought about taxation challenges in three primary realms: profit taxes, consumption taxes, and income taxes. These will be elaborated upon following discussion.
Taxing the platform’s activities (Profit tax):
Profit taxes are the taxes levied on the net profits of enterprises. The cross-border nature of gig platforms complicates the taxation of profits, as it becomes difficult to determine where the profit is generated. Moreover, valuing intangible assets like data is proving to be demanding, adding complexity to the taxation of profit of gig platforms.
Taxing the transactions (Consumption tax):
An alternative avenue for taxing gig platforms lies in consumption taxes, wherein taxes are imposed on the consumption of goods and services rather than directly on the profit earned by the gig platforms. However, this method faces hurdles, especially concerning cross-border and intangible transactions managed by these platforms.
Consider a scenario where an online accommodation booking platform facilitates a transaction between a traveller and a host. Tracking and imposing taxes on such transactions become challenging due to their intangible and often cross-border nature. This complexity complicates the application of traditional consumption taxes like VAT, Sales Tax, and Tourist Tax, especially when the question of who imposes and collects tax arises. For instance, VAT and sales tax are mostly national taxes, whereas in many countries tourist tax is a local tax.
The issues with consumption taxes can be understood from the case of India, which will be explored in more detail in this blog.
Taxing the gig workers (Income tax):
The classification of gig workers as independent contractors shifts the responsibility of taxation to the workers, making it difficult for tax authorities to identify and track this heterogeneous group. The ease with which gig workers enter and exit the labour market, coupled with their use of multiple platforms, adds another layer of complexity.
Additionally, many gig workers fall below taxable income thresholds, further complicating the issue.
The Indian Case: DGGI and Gig Platforms
In India, the intricacies of taxing gig platforms came to the forefront when the Directorate General of GST Intelligence (DGGI) issued GST demand notices to Swiggy and Zomato. The Pune zone of DGGI claimed that over 750 crores were pending taxes on delivery charges spanning from July 2017 to March 2023. DGGI argued that since food delivery is a service, Swiggy and Zomato are obligated to pay GST at a rate of 18%.
However, Swiggy and Zomato contested these claims, asserting that it is not their responsibility to pay taxes on delivery charges. They argued that these charges do not constitute revenue for the platform; instead, they are distributed among gig workers. Moreover, since each gig worker falls below the ₹20 Lakh threshold, they are exempt from GST. Despite the ongoing debate between gig platforms and tax authorities, a clear resolution seems elusive.
This case vividly highlights the complexity of taxing gig platforms in India. The disagreement between Swiggy/Zomato, and the tax authority underscores the need for greater clarity and alternative thinking in shaping the country's taxation system. However, India is not the only country which is struggling with this tax maze. Italy’s Guardia di Finanza tax police alleged in June 2021 that Booking.com evaded 153 million euros of value added tax (VAT) in connection with holiday rentals from 2013 to 2019.
Similarly, UK tax authorities claimed for outstanding VAT payment from Uber and the company settled $777.2m in outstanding VAT.
Alternatives to Address Taxation Challenges
As traditional tax systems often fail to keep up with the complexities of taxing gig platforms and workers, various countries have adopted alternative and innovative methods to tackle this issue.
To tackle profit taxation challenges, unilateral and multilateral approaches have been adopted globally. Kenya has adopted a unilateral tax system, under this system one country decides its own tax rules and rates without working with other countries, while the EU has embraced a multilateral approach, considering the cross-border nature of gig platforms.
Countries like Serbia and Estonia, have explored alternative approaches to address the challenges of taxing gig workers. Serbia introduced two taxation models, targeting occasional and regular gig workers. Estonia collaborated with gig platforms to effectively identify and track gig workers.
For consumption taxes, alternative approaches have been adopted, including:
- The platform-as-tax-agent model: Platforms collect and remit VAT/GST from transactions and remit to the government.
- The VAT/GST Split method: Taxes are automatically divided between the tax authority and the platform upon payment.
- The Information sharing obligation approach: Tax authorities can mandate platforms to share user and transaction data to ensure proper taxation.
Despite these efforts, taxing gig platforms and workers remains an unresolved global issue. As the gig economy expands, a concerted focus on resolving tax-related challenges becomes imperative to adapt to the evolving nature of work and employment.
The experiences of countries like India underscore the importance of prioritising regulation over solely engaging in legal battles between tax authorities and gig platforms. It is clear that collaborative efforts, informed policies, and proactive regulation are essential for fostering fairness and efficiency in taxation within the dynamic realm of the gig economy.