US initiates process on retaliatory action against India’s equalization levy

New Delhi: A day after India’s trade minister Piyush Goyal interacted with his US counterpart Katherine Tai, the US Trade Representative (USTR) proposed retaliatory action under Section 301 against India’s equalization levy (EL), along with other countries.

“USTR is proceeding with the public notice and comment process on possible trade actions to preserve procedural options before the conclusion of the statutory one-year time period for completing the investigations,” USTR office said in a statement.

US is committed to working with its trading partners to resolve its concerns with digital services taxes, and to addressing broader issues of international taxation, Tai said. "The United States remains committed to reaching an international consensus through the OECD process on international tax issues. However, until such a consensus is reached, we will maintain our options under the Section 301 process, including, if necessary, the imposition of tariffs,” she said.

“Government of India will examine the proposed action with the stakeholders concerned and would take suitable measures keeping its trade and commercial interest of the country and overall interest of its people,” an Indian commerce ministry official said under condition of anonymity.

The US had announced initiation of investigation under section 301 of the U.S. Trade Act, 1974 against the taxation on digital services adopted or under consideration by countries including the 2% equalisation levy applied by India on non-resident e-commerce operators not having a permanent establishment in India.

Other counties under investigation included Italy, Turkey, United Kingdom, Spain and Austria. The investigation examined whether the EL discriminated against US companies, was applied retrospectively, and diverged from US or international tax norms due to its applicability on entities not resident in India. The US requested for bilateral consultations in this matter and India submitted its comments to the USTR on 15 July 2020, participated in the bilateral consultation held on 5 Nov 2020.

“India made a strong case that the EL is not discriminatory and only seeks to ensure a level-playing field with respect to e-commerce activities undertaken by entities with permanent establishment in India. It was also clarified that the EL was applied only prospectively, and has no extra-territorial application, since it is based on sales occurring in the territory of India through digital means,” the Indian official said.

The official said EL is recognition of the principle that in a digital world, a seller can engage in business transactions without any physical presence, and governments have a legitimate right to tax such transactions. “The levy does not discriminate against any US companies as it applies equally to all non-resident e-commerce operators, irrespective of their country of residence,” he added.

The office of USTR on 6 January released its findings on the section 301 investigation into India's digital services tax (DST) and concluded that India’s DST, by its structure and operation, discriminates against US digital companies. The report said India’s DST is unreasonable as it is inconsistent with principles of international taxation, including due to its application to revenue rather than income, extraterritorial application, and failure to provide tax certainty; and India’s DST burdens or restricts US commerce.