Read the following passage carefully and answer the questions given below it. Certain parts are given in bold to answer some of the questions based on the passage.

Economist Jeffrey Sachs has rarely met a boondoggle he didn’t like. So, it shouldn’t be surprising that he has now argued for a “tech tax”—essentially, “finding ways to tax capital income and IP [intellectual property] income”. The thing is, he is not the only one. The concept of a tech tax is gathering momentum. The European Union (EU) has been grappling with it since March this year. India introduced it in the Finance Act 2018. Australia is considering it and so are a number of other countries. It is a clear sign of the difficulty of dealing with the changing nature of the digital economy.

Cheap services and products built on the back of technological innovation enable productivity growth among the poor. They can aid farmers in price discovery, say, or give a push to financial inclusion and credit access. This is a given. But Dani Rodrik has pointed out that new technologies can also have downsides for developing economies. They show a bias towards skill and education when it comes to job creation. This reduces the labour arbitrage advantage developing economies have. The overall shift in income distribution from labour to IP doesn’t help.

The digital economy’s combination of intangible capital and disaggregated business models also creates an almighty headache for governments when it comes to taxation. Businesses that depend on monetizing user data for revenue, for instance, may realize millions of dollars of value from a tax jurisdiction without having a significant, taxable presence in it. The revenue can be registered to dummy head offices set up in low tax jurisdictions. Meanwhile, the difficulty of pricing intangible capital accurately undercuts measures such as the arm’s length principle meant to keep companies reasonably honest when indulging in transfer pricing for tax avoidance purposes.

In 2011, San Francisco, the heart of the global tech industry, phased out the payroll tax and replaced it with a gross receipts tax—a popular move with tech companies since they often have large workforces before they have revenue. The tactic worked. Tech companies flooded into formerly blighted parts of the city. The unemployment rate fell by almost two-thirds over the next few years. But with the growth came disruption as gentrification pushed poor residents out of their houses and home prices rocketed to well over the national average. Thus, in 2016, members of the city’s administration proposed a payroll tax targeting only tech companies; the revenue would be used to build affordable housing and homeless shelters. They had seized upon the most visible target—no matter that a tax targeting a job-creating sector could be counterproductive or that the city’s long-running housing problem had as much to do with restrictive building regulations that choke supply.

As for India, the ‘significant economic presence’ (SEP) concept introduced in the Finance Act this year—it means that if a company has an SEP in India, it has tax liabilities here whether it is based here or not—makes instinctive sense. The problem is creating thresholds that don’t stifle competition or open New Delhi up to accusations of protectionism. An even bigger problem is finagling such a regulatory change without becoming entangled in existing bilateral tax treaties. These moves take aim at legitimate problems which will grow in scale as IP comes to play an increasingly important role in traditional sectors such as automobile. But the transnational nature of digital businesses demands a multilateral response rather than a patchwork of rivalrous measures. This is difficult at a time when protectionism is on the rise, but all the more important for it. The Organisation for Economic Co-operation and Development’s work on a new framework for base erosion and profit shifting for example, could do far more to shape an effective response to the digital economy than the EU’s levy. Getting there, however, will require governments to refrain from letting frustration goad them into making counterproductive policy.

Q1. What is/are the impediments associated with the implementation of SEP under Finance Act?
(I) Identifying the intensity of the economic presence of a company so that it doesn’t restrain the competition.
(II) Intellectual property plays an important role in modern sectors.
(III)Implementation of SEP might muddle with the existing bilateral tax treaties
(a) Both (II) and (III)
(b) Only (II)
(c) Only (III)
(d) Both (I) and (III)
(e) All of these

Q2. How can new technologies become a pitfall for the developing economies?
(a) Economies wouldn’t be able to gain from the available resource of cheap labour.
(b) Technologies show a bias towards skill and education when it comes to job creation.
(c) There will be a shift in income distribution from Labour to IP.
(d) Both (b) and (c)
(e) All of these

Q3. What were the outcomes of the implementation of the gross receipt tax in San Francisco?
(I) Tech companies had spread even to the areas which were once neglected in the city.
(II) Poor residents had to face severe hardship as the home prices were increased to well over the national average.
(III) Unemployment rate had fallen by two-thirds over the next few years
(a) Only (I)
(b) Only (III)
(c) Both (I) and (II)
(d) Both (II) and (III)
(e) All (I) (II) and (III)

Q4. What is the author’s opinion regarding the proposal for the re-introduction of the payroll tax?
(I) Payroll tax on tech companies wouldn’t solve the housing problem as restrictive building regulations contributes equally to the problem.
(II) Payroll tax on tech companies might be disadvantageous as they reduce the rate of organic food in the country.
(III) Payroll tax would push the poor residents to out of their houses and home prices will rise over the national average.
(a) Only (I)
(b) Only (III)
(c) Both (I) and (II)
(d) Both (II) and (III)
(e) All (I) (II) and (III)

Solutions

S1. Ans. (d)
Sol. Both the alternatives (I) and (III) are correct. Refer to the 3rd line of the 5th paragraph, “The problem is creating thresholds that don’t stifle competition or open New Delhi up to accusations of protectionism. An even bigger problem is finagling such a regulatory change without becoming entangled in existing bilateral tax treaties.” However, alternative (II) is incorrect. It is to be noted that the next line “These moves take aim at legitimate problems which will grow in scale as IP comes to play an increasingly important role in traditional sectors such as automobile” does not state any challenge for SEP. Hence, option (d) is the most viable answer choice.

S2. Ans. (e)
Sol. Refer to the 3rd sentence of the 2nd paragraph “But Dani Rodrik has pointed out that new technologies can also have downsides for developing economies. They show a bias towards skill and education when it comes to job creation. This reduces the labour arbitrage advantage developing economies have. The overall shift in income distribution from labour to IP doesn’t help.” These lines also indicates that new technologies create more jobs for the skilled and educated. Also there has been a shift in the income distribution from labour to IP. Hence, option (e) is correct.

S3. Ans. (e)
Sol. Refer to the 3rd line of the 4th paragraph “The tactic worked. Tech companies flooded into formerly blighted parts of the city. The unemployment rate fell by almost two-thirds over the next few years. But with the growth came disruption as gentrification pushed poor residents out of their houses and home prices rocketed to well over the national average.” All the given points are mentioned in these sentences of the passage. Hence, option (e) is the most suitable answer choice.

S4. Ans. (a)
Sol. Refer to the 6th line of the 4th paragraph “Thus, in 2016, members of the city’s administration proposed a payroll tax targeting only tech companies; the revenue would be used to build affordable housing and homeless shelters. They had seized upon the most visible target—no matter that a tax targeting a job-creating sector could be counterproductive or that the city’s long-running housing problem had as much to do with restrictive building regulations that choke supply.” These lines verify the author’s opinion towards payroll tax on tech companies. However, alternative (III) is an outcome of the implementation of gross receipt tax. Since, alternative (I) is correct, option (a) becomes the most suitable answer choice.