Crying Foul: USTR calls India’s digital services levy discriminatory

Digital Services Taxes (DST) imposed by India, Italy and Turkey discriminate against American companies and are out of sync with established international tax principles, the US Trade Representative’s (USTR) office has said, rejecting New Delhi’s contention of its equalisation levy, or the so-called ‘Google tax’, being non-discriminatory. Although the USTR held off potential retaliatory tariffs against the country, for the time being, it warned it “will continue to evaluate all available options”. The US Trade Representative’s “Section 301” investigation into the DST suggests that of the 119 companies that are likely liable under the tax regime, 86 or 72% were American companies.

While New Delhi isn’t planning to roll back the levy, adopted from April 2020, anytime soon, it may review the impost once there is a global consensus on such taxation under a G20 framework that is being worked out, an official source indicated. Another senior government official termed the USTR’s probe finding “deeply flawed”, as it erroneously argued that the levy was imposed only on “non-resident” entities. In fact, it was brought in to ensure the level playing field between residents and non-residents.

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-tailers at 2% on the revenue they generate in India from eCommerce 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-commerce firms sans a physical presence in India over local competitors. The USTR probe argues that the levy taxes companies’ revenue rather than income, so it’s inconsistent with international tax principles. But the Indian official points out that several international tax measures such as tax on royalty and on technical fees are levied on revenues received as royalty or fees for technical services. Similarly, the US probe seems to argue that companies should not be subject to a country’s corporate tax regime absent a territorial connection to it. But the Indian official said as many as 50 of the 52 US states have enacted laws on taxation of remote sellers and marketplace facilitators, which tax entities that are not US residents.

Earlier, in its reply to the office of the USTR office, India had opposed the US probe, firmly asserting that its equalisation levy was “non-discriminatory”, has only prospective application and didn’t specifically target American companies. “The underlying policy objective and application of India’s equalisation levy is to ensure that neutral and equitable taxation is applicable to e-commerce operators that are resident in India or have a physical presence in India and those that are not resident in India.” “The purpose is to ensure a level playing field with regard to e-commerce activities undertaken in India.

“This, in fact, is the very antithesis of the underlying apprehensions listed out in the USTR’s S.301 DST Initiation,” India had argued. The probe was launched under the Section301 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.