NEW DELHI: The US on Tuesday initiated investigation into digital services taxes (DST) that have been either adopted or are being considered by 10 of its trading partners including India that could invite punitive tariff sanctions. The move could heighten trade tensions between the US and India which has delayed signing of a limited trade package between the two.
The other countries being investigated are Austria, Brazil, the Czech Republic, the European Union, Indonesia, Italy, Spain, Turkey, and the United Kingdom.
The investigation will be conducted by the United States Trade Representative (USTR) under Section 301 of its Trade Act that empowers it to respond to a foreign country’s action considered unfair or discriminatory and which negatively affects US trade.
"President (Donald) Trump is concerned that many of our trading partners are adopting tax schemes designed to unfairly target our companies," said USTR Robert Lighthizer in a statement. "We are prepared to take all appropriate action to defend our businesses and workers against any such discrimination."
To expand its tax base and address the challenges from rapid digitalization of the economy, the Indian government through the Finance Act 2016 introduced an equalization levy on certain non-resident businesses such as mobile phone apps, social media platforms and digital content streaming services with customer base in India. The levy was applied at a rate of 6% on online advertisements on such platforms.
Through the Finance Act 2020, the government expanded the scope of the equalization levy to revenues generated by non-resident e-commerce companies operating in India with annual revenues in excess of ₹2 crore. The 2% digital services tax which came into effect on 1 April is what now USTR is seeking to investigate. The tax came as a surprise to e-commerce companies as the provision was not part of the finance bill and was introduced as an amendment at the last minute before the Parliament passed the bill.
After the bill was passed by the Parliament in March, EY India in a statement said this will pose immense practical challenges to implement, considering the extraordinary constraints arising out of measures taken by countries around the world including India to control spread of covid-19 pandemic.
"The new equalization levy provision also raises multiple issues on scope and ambit coupled with interplay with withholding provisions. For instance, it is not clear why exemption on incomes subjected to equalization levy is made applicable from 1 April, 2021, when it is made applicable from 1 April, 2020. The CBDT may also need to expeditiously clarify doubts arising on scope coverage of goods and services sold by resident e-commerce participants, services like royalties and fees for technical services by non-resident service providers facilitated through non-resident e-commerce operators," it added
A commerce ministry official under condition of anonymity said the announcement by the USTR investigation into India’s equalization levy is merely a first step initiation and is independent of other trade negotiations.
“US law mandates consultation with the alleged party – in this case the Government of India – hence India will have the opportunity to defend its taxation policy. Even if the USTR determines India’s policy is an unfair trade practice, India will have another opportunity to negotiate with the U.S. and prevent the imposition of tariffs," the official added.