07/01/21

US: Trade Representative calls India's digital economy tax discriminatory.

As published on livemint.com, Thursday 7 January, 2021.

NEW DELHI: The US Trade Representative (USTR) has found in an investigation that India’s 2% tax on digital economy, which into force last April, was “unreasonable or discriminatory". The tax is actionable under US laws which authorise withdrawal of trade concessions or imposing duties on exports from India, USTR said.

The office of the USTR said in a statement received on Thursday that the investigation has led to the conclusion that the 2% tax—called equalisation levy—was discriminatory because it exempts Indian companies and targets non-Indian firms.

This hits US firms as they dominate the technology industry. The USTR pointed out in the investigation report that of the 119 companies that it identified as likely liable under the digital services tax, 86 or 72% were US companies.

“The USTR has determined that India’s Digital Services Tax (DST) is unreasonable or discriminatory and burdens or restricts US commerce and thus is actionable under Section 301 (of its Trade Act)," said the probe report.

This section authorises the US government to withdraw trade benefits, impose duties and import curbs or deny federal permits to supply services in some sectors. Also, it can engage with a foreign government to phase out the policy covered under the probe and offer compensatory trade benefits.

Effective last April, India expanded the scope of its equalisation levy—first brought into force in 2016 targeting offshore firms hosting advertisements aimed at Indian consumers—to cover other e-commerce supplies by non-resident players. It covers all sorts of digital ecommerce transactions into India as well as those transactions which use Indian data if the offshore digital economy firm’s revenue from India is ₹2 crore or more.

The idea is to tax payments made to offshore entities which do not have a physical presence here and, therefore, the Income Tax department cannot tax such income earned from India.

The USTR pointed out that this levy covers revenue generated from a broad range of digital services offered in India, including digital platform services, digital content sales, digital sales of a company’s own goods, data-related services, software-as-a-service and several other categories of digital services.

This has huge implications for US firms. “USTR estimates that the aggregate tax bill for US companies could exceed $30 million per year," the probe report said.

Indian officials have described the equalisation levy as a fair, reasonable and non-discriminatory tax aimed at all offshore digital economy firms accessing the local market and have denied it targets US companies.

Officials have also said that India will drop this levy once global consensus builds up on a more equitable tax rules covering tech giants. The individual steps that India and other countries have taken specifically to tax digital economy firms indicate that the rules that exist today are not adequate to address the concerns around the erosion of tax base, Mint reported on 16 December quoting Rasmi Ranjan Das, a joint secretary in the finance ministry.