Agreement on global digital tax likely to boost India-US trade negotiations

NEW DELHI:  The success of global tax treaty will pave the way for the India-US trade negotiations which were stuck over digital tax, officials in Commerce Ministry claims.“The digital tax imposed on large US multinationals like Google, Facebook, Amazon was one of the stumbling block during the trade negotiations between the two countries. After the success of global tax treaty, this matter will be automatically resolved and will pave way for fresh negotiation,” a senior official from commerce ministry said.

India imposed a 2% equalisation levy starting in April last year on earnings in the country by foreign technology and e-commerce companies like Amazon, Facebook and Google. It was opposed by the administration of former President Donald Trump, and he flagged the concerns many times, stopping trade negotiations. In 2018,  Trump imposed 25% duties on steel and aluminium imports from India. In 2019, Trump withdrew the special treatment for some Indian exports, mostly low-tech items and handicrafts, under the General System of Preferences (GSP) that exempted them from import duties.

Later, even Biden government reinvigorated tariff war against India with retaliation against digital tax.
In June 2020, USTR initiated investigations into the digital services tax adopted or under consideration in ten jurisdictions: Austria, Brazil, the Czech Republic, European Union, India, Indonesia, Italy, Spain, Turkey, and the UK. The US Trade Representative had found India’s 2% equalisation levy unreasonably contravening international tax principles and specifically discriminating against US digital companies. On June 2 this year, US Trade Representative Katherine Tai announced the plan for the 25% increase in the tariffs on 26 items from India — from prawns and Basmati rice to furniture and jewellery — in retaliation to New Delhi’s Digital Services Tax (DST) imposition on tech giants. “Estimates indicate that the value of DST payable by US-based company groups to India will be up to approx $55 million per year,” Tai had said. But announcing it, Tai added that the hikes will be on hold till December.

Explaining the reason for holding the increases in abeyance for the six countries, Tai said it was to help the international negotiations on taxation.Now that India has agreed to join the treaty, it has to let go the equalisation tax and instead it will be able to tax big multinationals doing business in the country, without a physical presence or permanent establishment, at 20 per cent of their profits. The framework got the approval of the G7 leaders last month and is expected to come up at the meeting of the finance ministers of the G20 group of major economies in Venice next week.