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India's Digital Services Tax Equalisation Levy

India's Digital Services Tax/Equalisation Levy

CONTEXT:

The e-commerce market is set to expand to $200 billion by 2026.  

India had adopted the operative form of its Digital Services Tax or DST on March 27, 2020.

Definition: These are taxes on revenues that certain companies generate from providing certain digital services to, or aimed at, users in those jurisdictions.

                           

CRITICISM OF INDIA’S DIGITAL SERVICE TAX/DISADVANTAGES/ US OPINION:

Burdens to double taxation: USTR describes DST as an outlier which burdens US companies by subjecting them to double taxation.

Against US digital companies: DST, by its structure and operation, discriminates against US digital companies, including due to the

  • Selection of covered services and
  • Its applicability only to non-resident companies.

Inconsistent with principles of international taxation: DST is unreasonable because it is inconsistent with principles of international taxation including due to its application to revenue rather than

  • Income,
  • Extraterritorial application, and
  • Failure to provide tax certainty.

Discrimination b/w USA & Indian Companies: US non-resident providers of digital services are taxed, while Indian providers of the same digital services to the same customers are not.

Impede global economic and technological advancement:

Burden of tax to consumers: Tech giants would pass on the burden of tax to the end consumers or the sellers. This will affect affordability and accessibility.

ADVANTAGE/ FEATURES OF INDIA’S DIGITAL SERVICE TAX/ INDIA’S RESPONSE TO CRITICISM:

Huge consumer base and Significant Economic Presence: Google, Facebook, Amazon etc., which have a huge consumer base in developing countries like India.  

Shift office to Low tax region: They avoid taxation by shifting their offices to low-tax regimes.

Equally to all non-resident e-commerce: It said the 2 % equalisation levy does not discriminate against US companies as it applies equally to all non-resident e-commerce operators irrespective of their country of residence.

No retrospective element: Ministry of Commerce on 7th Jan 2020 said, there is no retrospective element as the levy was enacted before the 1st day of April, 2020, which is the effective date of the levy.

No extra-territorial application: It also does not have extra-territorial application as it applies only on the revenue generated from India.

Level-playing field: India seeks to ensure a level-playing field with respect to e-commerce activities undertaken by entities resident in India as well as those not residents in India or without permanent establishment in India.

  • Digital tax will ensure a level playing field for both domestic and foreign players. In the absence of such a law, the goods and services provided by firms based in a foreign country would get taxed

Objective of DST: The purpose of the equalisation levy is to

  • Ensure fair competition,
  • Reasonableness and
  • Exercise the ability to tax businesses that have a close nexus with the Indian market through their digital operations.

CHALLENGES/ISSUES TO INDIA:

Unilateral action by USA/WTO Action:

Priority Watch List’: India continues to be on the ‘Priority Watch List’ of the United States Trade Representative (USTR) for ack of adequate Intellectual Property (IP) rights protection and enforcement.

Bilateral trade deal:  is affected + FTA

WAY FORWARD:

OECD- Negotiations with over 130 countries to adopt international tax system.

  • One goal is to address the tax challenges of the digitalization of the economy.

OECD BEPS:

G20: In 2019, Agreed to digital tax.

DIGITAL SERVICES TAX OR DST:

These are taxes on revenues that certain companies generate from providing certain digital services to, or aimed at, users in those jurisdictions.

  • E.g. Digital multinationals like Google, Amazon and Apple etc.

India had adopted the operative form of its Digital Services Tax or DST on March 27, 2020.

The DST imposes 2% tax on revenue generated from a broad range of digital services offered in India, 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

Source: Business Standard, The Hindu