The United States Trade Representative (USTR) has completed an investigation into India’s Equalisation Levy on e-Commerce companies and termed this as ‘discriminatory’.
“India’s DST (Digital Service Tax, referred as Equalisation Levy in India) is discriminatory, unreasonable, and burdens or restricts US commerce, and thus, is actionable under Section 301 (of Trade Act, 1974),” USTR said in the investigation report. The investigation, initiated on June 2 last year, said that this tax explicitly exempts Indian companies and only ‘non-residents’ must pay the tax. US feels it is against the interests of its company operating in India.
Introduced in 2016, Equalisation Levy, also known as ‘Google Tax’, initially was applicable to payments for digital advertisement services received by non-resident companies without a permanent establishment (PE) here, if these exceeded ₹1 lakh a year. The rate of tax was 6 per cent. The companies using these services are required to withhold the tax amount. In the 2020-21 Budget, the government widened the ambit of the levy by including e-commerce companies. The applicable tax rate is 2 per cent (plus a surcharge) on the amount of consideration received/receivable by an e-commerce operator. This came into effect from April 1.
Here, an e-commerce operator means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both. The law says this levy will not be applicable for any e-commerce operator making/ providing/ facilitating e-commerce supply or services has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment. Also, an operator with annual turnover up to ₹2 crore is exempted from the levy.
The report said that the 2016 digital advertising tax is not the focus of this investigation. Rather, this investigation relates to an expansion of that 2016 tax that the Indian government passed in 2020, which has been referred to as DST, and that is applicable to e-commerce companies. The DST first appeared publicly on March 23, 2020 in amendments to India’s 2020 Finance Act. Companies received no notice of this legislation before that date.
According to the report, just four days later — absent any opportunity for public comment — the DST became law. The tax then went into effect just five days later. To date, the Indian Government has not issued implementing regulations clarifying fundamental aspects of the DST, such as the scope of services covered, companies impacted, etc. India did, however, amend previously existing rules related to the mechanics of how to pay the DST in October 2020, the report mentioned.
Section 301 of US’s Trade Act sets out three types of acts, policies, or practices of a foreign country that are actionable: (i) trade agreement violations; (ii) acts, policies or practices that are unjustifiable (defined as those that are inconsistent with US international legal rights) and burden or restrict US Commerce; and (iii) acts, policies or practices that are unreasonable or discriminatory and burden or restrict US Commerce.
Actions authorised under the said section include: (i) suspending, withdrawing, or preventing the application of benefits of trade agreement concessions; (ii) imposing duties, fees, or other import restrictions on the goods or services of the foreign country; (iii) entering into binding agreements that commit the foreign country to eliminate or phase out the offending conduct or to provide compensatory trade benefits; or (iv) restricting or denying the issuance of service sector authorisations, which are federal permits or other authorisations needed to supply services in some sectors in the United States.