Another source said the USTR announcement is just a first step towards a probe and isn’t an intimation of tariffs or other punitive measures as yet.

Escalating the global controversy over digital taxation, the US has initiated investigation against India and nine other jurisdictions, including the European Union and the UK, for imposing or considering digital services taxes with potential to hurt American companies. The move could flare up trade tensions if the US decides to slap punitive tariffs at the end of the probe.

Official sources here, however, stressed that the probe initiation by the US should not be construed as a move of aggression against India, as it is targeted at the policy of digital taxation that has emerged in a clutch of countries, including Washington’s close allies. These sources also averred that US-India trade discussions won’t be impacted by the move, and cited the fact that the US had announced FTA negotiations with UK on May 5, 2020, but has now initiated the ‘Section 301 investigation’ against that country on digital taxation.

The office of the US Trade Representative (USTR) said India adopted a 2% DST (digital services tax) in March. “The tax applies only to non-resident companies, and covers online sales of goods and services to, or aimed at, persons in India. The tax applies only to companies with annual revenues in excess of approximately Rs 20 million (approximately $2,67,000),” it said. The tax went into effect on April 1.

“President (Donald) Trump is concerned that many of our trading partners are adopting tax schemes designed to unfairly target our companies,” USTR Robert Lighthizer said in a statement. “We are prepared to take all appropriate action to defend our businesses and workers against any such discrimination.”

New Delhi, for its part, is set to oppose the probe on the ground that its equalisation levy, or the so-called Google Tax, doesn’t specifically target American digital firms and is well within its multilateral commitments under the General Agreement on Trade in Services at the WTO, a source told FE.

Another source said the USTR announcement is just a first step towards a probe and isn’t an intimation of tariffs or other punitive measures as yet. Also, the US law mandates consultation with the alleged party. So even if the USTR determines that India’s policy is unfair, New Delhi will have another opportunity to negotiate with Washington and prevent the imposition of punitive tariffs. The USTR office has sought written comments from stakeholders for its plan by July 15.

The latest impost was introduced in the Finance Act 2020 by widening the scope of the equalisation levy to include e-commerce players and intermediaries. It’s a sort of digital tax on non-resident e-commerce operators at 2% on the revenue they generate in India from e-commerce supply or services. This levy has to be deposited by the e-commerce operator and not by the buyer of the goods or service.

Earlier, the equalisation levy (at 6%) was introduced in 2016 and slapped on the revenues generated on business-to-business digital advertisements and allied services of the resident service provider. The levy is designed to nullify the advantage of foreign e-commerce firms sans a physical presence in India over local competitors. The 2016 levy had impacted companies like Google and Facebook, among others.

While the precise scope of the 2% levy is being debated, some analysts have said an Indian resident purchasing goods from the Amazon (US) or Alibaba or even a transaction between the Amazon US and Amazon India, too, could trigger this levy, as the latter would be treated as a resident.

Noted tax expert Mukesh Butani wrote in The Economic Times recently: “The provision (of 2% levy) needs clarity on various counts. The definition could encompass businesses that sell goods and services to Indian resident customer over the Internet, such as retailers, manufacturers, banking or insurance companies, payment processing and payment facilitation companies etc.”

According to the USTR office, it will conduct the investigation under the Section 301 of the Trade Act of 1974. This law authorises authorities to initiate action, including punitive tariffs, in response to a foreign country’s action that is deemed unfair or discriminatory and curbs American trade.

Apart from India, the others that are being investigated are the EU, the UK, Austria, Brazil, the Czech Republic, Indonesia, Italy, Spain and Turkey.

Sources also indicated that it’s not an American policy aggression against India, as even US allies like the EU and the UK are being probed.

Several countries have been seeking to slap a digital service tax and the OECD has been working on a proposal to address the profit-shifting of some multinational companies to avoid paying taxes in certain jurisdictions. Earlier this year, several EU nations, including France and the UK, indicated they would move ahead with their own digital tax decisions if there was no pact at the OECD level by the end of this year.

Seeking to start 301 probe against the EU, the USTR on Tuesday said the block is considering such a tax, as part of the financing package for its proposed Covid-19 recovery plan. “The EU DST is based on a 2018 DST proposal that was not adopted. The 2018 EU proposal included a 3% tax on revenues from targeted advertising and digital interface services, and would have applied only to companies generating at least €750 million in global revenues from covered digital services and at least €50 million in EU-wide revenues for covered digital services,” the USTR said.

In India, an expert committee had proposed extension of the impost to a clutch of other online activities and to B2C transactions above a certain threshold. The tax on e-commerce players and intermediaries imposed via Finance Act 2020 is sync with the panel’s suggestion.

Yet, the impost has not been extended to an array of other services, which as per the panel’s suggestion, too are liable to be taxed if directly rendered to India by the overseas parent/associates of foreign technology players.

In its report submitted to the government in March 2016, the committee set up by the finance ministry suggested levy between 6% and 8% on amounts paid to non-residents by an Indian resident or permanent establishment (PE) of a non-resident for specified digital services. It said: “…but such obligation should be limited to only those payers who wish to claim that payment as a deductible expense for determining taxable profits in India. Committee also notes that deduction by payment gateways and by authorised foreign exchange dealers can significantly reduce the obligations on payers, and strongly recommends that work should be initiated for exploring this possibility.”

According to the committee, once such levy is imposed, the income arising from the relevant transaction won’t be subjected to income tax to avoid double taxation. The foreign firm won’t get credit in its home country for the equalisation tax paid here. Many analysts feel the levies would raise the burden on the digital industry and run contrary to the government’s campaign for digitisation.