India’s equalization levy is unfair: USTR2 min read . Updated: 07 Jan 2021, 11:28 PM IST
- USTR said the tax is actionable under US laws which authorise withdrawal of trade concessions or imposing duties on exports from India
- USTR identified 119 companies as likely liable under the digital services tax, of which 86, or 72%, were US companies
India promised “appropriate action" after a US Trade Representative (USTR) investigation report said New Delhi’s 2% tax on the digital economy is “unreasonable or discriminatory", potentially attracting withdrawal of US trade concessions or duties on Indian exports. The tax, called equalization levy, came into force in April 2020.
The office of the USTR said in a statement on Thursday that its investigation has led it to conclude that the tax was discriminatory because it exempts Indian companies and targets non-Indian firms. This hits US firms which dominate the technology industry. The USTR pointed out that of the 119 companies that it identified as likely liable under the digital services tax, 86, or 72%, were American.
“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 authorizes 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.
With effect from last April, India expanded the scope of its equalization levy that was 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 e-commerce transactions in 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 subject such income earned from India to tax.
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 report said.
India took note of the probe’s conclusion and said it will take appropriate action. “The government of India will examine the determination/decision notified by the US in this regard, and would take appropriate action keeping in view the overall interest of the nation," a commerce ministry official said on condition of anonymity.
The official clarified that there was no retroactive element or extra-territorial application involved in the levy which applies only on the revenue generated from India.“It is a 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 official said. Indian officials have described the equalization 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.