USTR backs action against India's equalisation levy, finds it burdensome

The US has held that India’s 2 per cent digital tax on technology majors is unreasonable, burdensome and discriminatory against American companies like Amazon, Google, and Facebook and inconsistent with international tax principles. The US Trade Representative (USTR) office has noted that India's digital services tax (DST) or equalisation levy was 'actionable' under Section 301 of the Trade Act.

Highlighting the discrimination part, the report said that of the companies that are subjected to India's equalisation levy, 72 per cent are American companies.

“The USTR’s investigation would support a finding that India’s DST is actionable under Section 301,” the USTR report said.

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 and take appropriate action, including tariff-based and non-tariff-based retaliation.

“Our investigation would support a finding that the digital services tax (DST) burdens or restricts US commerce by negatively impacting US companies’ operations in India. More specifically, the DST creates a significant new tax burden for US companies, taxes an unusually broad array of digital services, forces US companies to undertake costly compliance measures, and subjects US companies to multiple layers of taxation,” said USTR in its investigation findings report.

It further noted that India’s DST contravenes prevailing international tax principles, and is therefore unreasonable.

The report highlighted that USTR’s analysis identified 119 companies likely subject to the DST, of which 86 (72 per cent) are US companies, followed by China and the UK with 7 companies each, France with 6 companies, and Japan with 5. Besides, India’s DST taxes a broader range of services than other digital services taxes adopted around the world, which expands the universe of US companies subject to the DST, and increases the tax burden that US firms face, it 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 USTR report further pointed out that India’s DST burdens US companies by subjecting them to double or in some cases multiple layers of taxation. “US companies that pay the DST in India will still be subject to US corporate income tax, creating two layers of taxation,” the report said..

The report also raised the issue of implementation of the DST by the Indian government in a ‘hasty manner’, which exacerbated the compliance challenges for affected companies.

The USTR report said that commentators estimate that compliance costs for India’s DST will be “in the millions” for each company, and “the administrative burden associated with compliance is significant, even if firms can pay the tax.”

The Internet Association representing Google, Amazon, Facebook and Ebay has strongly pressed for retaliatory action against India for the digital services tax, arguing that the 2 per cent equalisation levy was unreasonable and discriminated against US companies, in its comment to US Trade Representative over the Section 301 investigation launched last month.

However, IBM, US Chamber of Commerce (USCC) and Consumer Technology Association (CTA) with Adobe, 3M and Accenture have opposed any retaliatory tariffs, arguing that it will only hurt American companies and has urged USTR to work towards a multilateral solution on the issue.

India had defended the imposition of 2 per cent equalisation levy as ‘non-discriminatory’ in its comment on the Section 301 investigation and had said that it was fully consistent with the World Trade Organisation and international taxation agreements. New Delhi had said that the levy cannot be said to have ‘extra-territorial’ application citing the OECD’s Base Erosion and Profit Shifting (BEPS) Report. It had brought out tax challenges arising from the digitalisation of the economy and notes that the physical presence nexus in existing international taxation rules, which were developed in the last century keeping in view the business models of that time were no longer the only justifiable indication of nexus.

Sandeep Jhunjhunwala, partner, Nangia Anderson LLP said that it was unlikely that the USTR investigation report will deter India from continuing with the equalisation levy. “It will be interesting to see what measures the governments take to resolve the issue bilaterally. Given the political condition in the US, it is likely that Washington may not take any extreme steps against India as it did with France on the DST tussle,” he said.