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India’s 2% equalisation levy discriminatory, unilateral: US

India’s 2% equalisation levy discriminatory, unilateral: US

New Delhi: The United States Trade Representative (USTR) has determined that digital services taxes adopted by India discriminated against American companies and were inconsistent with international tax principles, but stopped short of taking specific actions, saying it ‘will continue to evaluate all available options’. The Indian government said it would examine the determination and decision notified by the US, and take appropriate action keeping in view the overall interest of the nation.

The USTR, in a report issued Wednesday, said India’s 2% equalisation levy is imposed on revenue generated from a broad range of digital services offered in the country, including digital platform services, digital content sales, digital sales of a company’s own goods, data-related services, software-as-a-service, and several other categories of digital services and applies only to “nonresident” companies.

“The US Trade Representative has determined that India’s Digital Services Tax (DST) is unreasonable or discriminatory and burdens or restricts US commerce and thus is actionable under Section 301,” it said, paving the way for likely higher duties and import and services sector restrictions. The 2% equalisation levy, or the so-called Google tax, came into effect on April 1, 2020. The USTR has identified 119 companies that are likely to be liable under the DST, out of which 86, or 72%, are American companies. In its report, the USTR said besides failing to provide tax certainty, the “unilateral” levy leads to double taxation and additional tax burden and, being a tax on revenue, is inconsistent with the international tax principle that accords income as the appropriate basis of taxation.


The government had earlier imposed a 6% levy on digital advertising aimed at taxing overseas digital companies on the business they do in India, but that was not the focus of this investigation. “This investigation does not include the 2016 digital advertising tax within its scope, and this report expresses no views on whether the 2016 digital advertising tax may or may not be actionable under Section 301,” the USTR said.

India said it would examine the findings in the report. The government, however, said India has not discriminated against any country. “There is no retrospective element in the levy and it does not have extraterritorial application,” said the government, adding that the levy was one of the methods suggested by the 2015 OECD-G20 report of Base Erosion and Profit Shifting Project, aimed at tackling the taxation challenges arising from digitisation of the economy.

The 2% levy is applicable on nonresident ecommerce operators not having a permanent establishment in India. “The threshold for this levy is Rs 2 crore, which is very moderate and applies equally to all ecommerce operators across the globe having business in India. The levy does not discriminate against any US companies,” the commerce and industry ministry said.

New Delhi has maintained that the levy is not discriminatory but seeks to ensure a level playing field with respect to ecommerce activities undertaken by entities resident in India, and those that are not resident in India or do not have a permanent establishment here. Commerce and industry minister Piyush Goyal on Monday had a conversation with outgoing USTR Robert Lighthizer where no business was discussed and it was only a courtesy call, people in the know said.

The USTR issued similar reports on Turkey and Italy as well. Last year, the US initiated investigations into 10 nations and blocs including India that have imposed such digital services taxes or are in the process of doing so. They included the UK, Brazil and the European Union. Interested persons filed over 380 written submissions in response to the notice of initiation for India.

Experts cautioned India against giving into any pressures from Washington to do away with the levy. “India should continue with the levy irrespective of any threats on its IT services exports to the US,” said one Delhi-based expert on trade issues. “It is unlikely that the USTR investigation will deter the Indian government and it will be interesting to see what measures the government takes to resolve this issue bilaterally,” said Sandeep Jhunjhunwala, partner, Nangia Andersen LLP. Another trade expert said New Delhi needs to be aware of any bullying tactics and fight for its cause like it did in the case of steel tariffs with the US.

( Originally published on Jan 07, 2021 )

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