The US has decided to launch an investigation against India for levying a 2 per cent digital tax on technology majors, to determine if it “unfairly targets” American companies like Amazon, Google, and Facebook.
The US Trade Representative (USTR) office will also conduct the Section 301 probe against nine others, including Austria, Brazil, Indonesia, Italy, Spain, Turkey, the Czech Republic, the UK, and the EU, for levying or considering digital services taxes “discriminating against US companies”.
Section 301 of the US Trade Act empowers the USTR to investigate a trading partner's policy action that may be deemed unfair or discriminatory and negatively affects US companies.
New Delhi strongly opposed the move, arguing that its digital tax measures fell within its sovereign rights and were in no way designed to discriminate against US firms.
“The equalisation levy imposed by India does not violate World Trade Organization rules and we are well within our rights to impose digital tax. The policy is quite broad and in no way discriminates against US companies. The US should rather focus on arriving at a consensus solution to tax digital companies at the ongoing discussions under the OECD Base Erosion and Profit Shifting (BEPS) framework,” a government official said.
India had through an amendment in the Finance Bill 2020-21 imposed a 2 per cent digital tax on trade and services by non-resident e-commerce operators with a turnover of over Rs 2 crore, expanding the scope of equalisation levy, which till last year only applied to digital advertising services. The new levy came into effect from April 1. E-commerce operators are obligated to pay the tax at the end of each quarter.
The move had drawn sharp reactions from American tech giants, including Amazon, Microsoft, Google, and Facebook, which wrote to the USTR in March, complaining that it was a highly discriminatory tax on foreign companies.
“India has a strong case here. There has to be some evidence to say the tax that you are levying will affect primarily US multinationals,” said another official.
“The levy is very broad in scope and equally applies to all e-commerce players, be it Chinese, Swedish, or American. It no way was designed to target American e-commerce companies, but simply to tax income accruing to foreign e-commerce companies from India,” the official added.
E-commerce firms that fall under the equalisation levy scope include Adobe, Uber, Udemy, Zoom.us, Expedia, Alibaba, Ikea, LinkedIn, Spotify, and eBay.
The US investigation initially will focus on whether digital services taxes discriminate against US companies, are retroactive, and reflect unreasonable tax policy. Public comments are invited till July 15.
USTR Robert Lighthizer said, “President Trump is concerned that many of our trading partners are adopting tax schemes designed to unfairly target our companies… We are prepared to take all appropriate action to defend our businesses and workers against any such discrimination.”
Akhilesh Ranjan, former CBDT member and chief negotiator at OECD BEPS, said India was not alone and several jurisdictions had implemented digital tax or were planning to implement as the US had gone back on its proposal at the OECD BEPS to tax the digital economy.
“It is the US, which in December had decided to go back on its proposal and said we cannot depart from the arm’s length principle and can’t agree to redefine nexus. The US is not fully participating in the discussions, so there is a reaction everywhere. It will be interesting to see how strongly the US can pursue this matter with nine different jurisdictions,” said Ranjan.
Sandeep Jhunjhunwala, partner, Nangia Andersen LLP, said the investigation had invited public comments and would primarily deal with issues like unreasonableness of tax policies, diverging provisions from US tax laws, extra-territorial rights, and whether the digital tax mechanism was being used to penalise technology giants for their atypical success graph or for being crisis-proof in current times. “India is racing towards becoming a digital giant, and one needs to wait to see if the details of this new levy would be negotiated to avoid any hurdles in its implementation,” he said.