The US on Tuesday initiated investigations into digital services taxes that have been either adopted or are being considered by 10 of its trading partners including India, a move that could invite punitive tariff sanctions. It could worsen India-US trade tensions which have delayed the signing of a limited trade deal between the two sides.
The investigation will be conducted by the United States Trade Representative (USTR) under Section 301 of its Trade Act that empowers the authority to respond to a foreign country’s action considered to be unfair or discriminatory and that negatively affects US trade.
“President Trump is concerned that many of our trading partners are adopting tax schemes designed to unfairly target our companies," said USTR Robert Lighthizer. “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, India introduced an equalization levy through Finance Act 2016 on certain non-resident businesses like mobile phone apps, social media platforms, digital content streaming services with a 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 further expanded the scope of the equalization levy to revenues generated by non-resident e-commerce firms 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 the USTR is seeking to investigate. The levy came as a surprise to e-commerce firms as the provision was not part of the finance bill. It 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 from 1 April 2020, particularly considering the extraordinary constraints arising out of measures taken by countries around the world including India to control the covid-19 pandemic.
A commerce ministry official said under condition of anonymity that the announcement of the USTR investigation against 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 US and prevent the imposition of tariffs," the official added.