Big tech may threaten to leave India if Modi imposes taxes. But he should do it anyway.

France and America are gearing up for a tussle thanks to France’s plans to tax U.S. tech firms. Washington is threatening to respond with investigations and tariffs. As the French look to extend digital taxation — they’ve proposed a 3 percent tax on companies that provide digital services to French users — should India do the same?

The arguments against doing so are endless. India does not have a domestic substitute for Facebook, Google or Twitter, and Indians rely on these technologies daily. According to WhatsApp, Indians spend 50 million minutes a day on video calls alone. Silicon Valley’s continued investments are also welcomed in India and have contributed significantly to Bangalore becoming the tech hub that it is today. Taxing these investors might make them reconsider any future plans. And then there’s the Trump administration, which is also likely to crack down on any attempt to tax American tech companies. Just last month, Trump tweeted that Indian tariffs were “no longer acceptable,” so any attempt to tax American companies is undoubtedly going to make the situation worse, stoking geopolitical tensions.

India has long had a field day putting Tariffs on American products. No longer acceptable! — Donald J. Trump (@realDonaldTrump) July 9, 2019

And yet, despite all this, Modi’s government should tax Facebook and Google. Why? Because the domestic and global context has perfectly shaped up for him to do so. We live in an attention economy where more time spent by more eyeballs on social networks directly translates into more money for Facebook and Google. In this context, India has the most eyes available (apart from China), and that means India has leverage.

As it stands, big tech companies do not pay a proportional amount of tax anywhere. From 2017 to 2018 in the United Kingdom, Facebook, Google, Apple, Cisco and Microsoft generated profits close to $8 billion. The combined tax they paid on these profits was $231 million — the U.K. Parliamentary Public Accounts Committee went so far as to say that Google “has created a complex operational structure that is directed at minimizing tax liabilities.” But it’s not just Google. Most tech giants have shaped up to operate similarly to avoid being taxed.

By taxing big tech, Modi would play a part in ensuring that regulation catches on and that technology firms begin paying their fair share. “Data economies leverage scale to increase profits. That is not normally the basis of taxation. But where data companies have become so profitable, it’s appropriate for governments to reconsider the basis of taxation to take into account user bases,” says Rahul Matthan, a partner at tech consultancy Trilegal.

While India may not have domestic substitutes for most of American big tech, it does have Chinese ones.

But what about the threat of these companies leaving? Some firms may leave, but India can safely call their bluff because it has alternatives. While India may not have domestic substitutes for most of American big tech, it does have Chinese ones. “There is a Chinese app for every American app you want to use. Because of high substitutability, the flight of capital is not something that would deter a tax regulator,” says Matthan.

In recent years, China has developed a stronger hold in the Indian market. Twice over the past year, for example, Beijing-financed Ola and China’s Alibaba group pumped in $680 million to Paytm, India’s largest mobile wallet operator (ahead of Google Pay). This takes Alibaba’s share of Paytm to 40 percent. China is also competing big in the social media market, with a controversial offering, Tiktok, being one of the most active user-generated content apps in India. According to technology news site FactorDaily, 44 of the top 100 Android apps in India this year were developed by Chinese companies, up from just 18 last year.

Now, all Chinese apps may not be in direct competition with American ones on the Indian app store, but should Facebook and Google threaten to leave, they can be sure that China will replace them. Neither Silicon Valley nor the Trump administration wants that. Losing the Indian market is one thing; losing to China is another. Besides, other countries might follow India’s lead.

When we put all of this in context, India taxing America’s big tech firms seems plausible. Big tech is infamous for not paying its fair share of taxes. The Indian market is a huge source of data and revenue. China is already fighting for ground against Silicon Valley. If anything, this puts Modi in a very comfortable position to make the next move.

Rohan Seth is a policy analyst for the technology and policy program at The Takshashila Institution.