Digital services tax in India discriminates against US firms: USTR

It observed that India's digital services tax (DST) is discriminatory on its face, as the law explicitly exempts Indian companies, while targeting non-Indian firms.

New Delhi: India’s 2 per cent digital services tax on e-commerce supply discriminates against US companies and is inconsistent with international tax principles, according to a US Trade Representative (USTR) investigation. The finding paves the way for potential retaliatory tariffs but the USTR did not immediately specify actions to counter such taxes. USTR’s investigation said the Indian levy discriminates against American companies, unreasonably contravenes international tax principles, and burdens or restricts US commerce. The latest report of the office of the USTR said that “our investigation indicates that India’s DST discriminates against US digital services companies”.

It observed that India’s digital services tax (DST) is discriminatory on its face, as the law explicitly exempts Indian companies, while targeting non-Indian firms. “The result is that US ‘non-resident’ providers of digital services are taxed, while Indian providers of the same digital services to the same customers are not. This is discrimination in its clearest form,” the USTR report said. According to the report, an Indian government official also confirmed that the very “purpose” of the DST is to discriminate against non-resident foreign companies, explaining that “all parts of the digital taxation incident should be on the foreign player, because if the incidence is passed on to the Indian player, then it doesn’t really serve the purpose”.

Moreover, it said the DST targets digital services but not similar services provided non-digitally. According to the report, because US companies are global leaders in the digital services sector, US companies face an inordinate share of tax burden. Indeed, of the 119 companies that USTR has identified as likely liable under the DST, 86 (or 72 per cent) are US companies, it said. The USTR report said the investigation also indicates that India’s DST unreasonably contravenes international tax principles. “At least three aspects of the DST are inconsistent with principles of international taxation,” it said.

The aspects include stakeholders having found the text of the DST to be unclear and ambiguous, which creates uncertainty for companies regarding key aspects of the DST, including the scope of taxable services and the universe of firms liable to pay the tax. “India has published no official guidance to resolve these ambiguities. This amounts to a failure to provide tax certainty, which contravenes a core principle of international taxation,” the USTR report said.

‘No discrimination against US firms’

New Delhi: Equalisation levy on foreign e-commerce firms does not have extra-territorial application as it applies only to the revenue generated from India, sources said. They said the levy does not discriminate against any US companies as it applies equally to all non-resident e-commerce operators, irrespective of their country of residence. These comments came against the backdrop of a US Trade Representative (USTR) investigation, which has concluded that India’s 2 per cent digital services tax on e-commerce supply discriminates against American companies and is inconsistent with international tax principles.

“There is no retroactive element as the levy was enacted before the 1st day of April 2020, which is the effective date of the levy. It does not have extra-territorial application as it applies only on the revenue generated from India,” the sources said.

They said that the Government of India will examine the decision notified by the US in this regard, and would take appropriate action keeping in view the overall interest of the nation. The sources added that the levy was one of the methods suggested by a OECD/G20 Report which was aimed at tackling the taxation challenges arising out of digitisation of the economy.

The purpose of the equalisation levy is to ensure greater competitiveness, fairness, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations, one of the sources said.

It is a recognition of the principle that in a digital world, a seller can engage in business transactions without any physical presence, and governments have a legitimate right to tax such transactions, they said. The sources also said India-based e-commerce operators are already subject to taxes in India for revenue generated from the domestic market. However, in the absence of the levy, non-resident e-commerce operators (not having any permanent establishment in India but a significant economic presence) are not paying taxes in respect of the consideration received in the e-commerce supply or services made in the Indian market, they added.

“The EL (equalisation levy), levied at 2 per cent, is applicable on non-resident e-commerce operator 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 e-commerce operators across the globe having business in India,” they added.