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Tax on Digital Services (30 March 2021)

Tax on Digital Services (30 March 2021)

Context:

The United States has proposed retaliatory trade actions against India and certain other countries that have imposed or are considering digital services tax on e-commerce companies.

Background:

  • In Jan 2021, the United States Trade Representative (USTR) published a report on the section 301 investigation into India's digital services tax (DST) and concluded that the 2% Digital Services Tax (DST) introduced by the Indian government by the 2020 Finance Act discriminates against US businesses and contravenes settled principles of international tax law.

Summary of the Debate

Retaliatory trade actions proposed by the United States Trade Representative (USTR):

  • The USTR has proposed to impose retaliatory tariffs up to 25 per cent on a wide variety of Indian products ranging from shrimps and basmati rice to gold and silver items,

  • It has been proposed on grounds that India’s digital services tax, also known as equalisation levy or Google tax, is unreasonable or discriminatory and burdens or restricts US trade.

  • As per the USTR report, the value of the digital services tax payable by US-based company groups to India will be up to approximately $55 million per year.

  • Companies affected by the 2 per cent equalisation levy include Google, Amazon, Linkedin and Facebook.

  • Similar action has been proposed against Turkey, Italy, the UK, Austria and Spain.

India’s digital service tax:

  • In India, companies are being taxed either on the resident basis or on the source basis.

  • In 2016, India was one of the first countries in the world to introduced a 6% equalisation levy.

  • The levy was restricted to online advertisement services, also known as Digital Advertising Taxes (DATs).

  • The levy applied on the payments made to a non-resident by the Indians for advertising on their platform.

  • In 2020, the government introduced an amendment to the equalisation levy in the Finance Bill 2020-21.

  • The amendment imposed a 2% digital service tax (DST) on trade and services by non-resident e-commerce operators with a turnover of over Rs. 2 crore.

  • This effectively expanded the scope of equalisation levy that, till last year, only applied to digital advertising services.

  • E-commerce operators are obligated to pay the tax at the end of each quarter.

US proposes retaliatory tariffs of up to 25% on select Indian goods in  response to India's equalisation levy - The Indian Wire

Why India introduced the digital service tax?

  • Digital companies do not have base in any country and that is why they are immune to the taxation system of various countries.

  • Digital companies sitting far away from India are earning from Indian market.

  • There are many other issues on which state is coming to tussle with the big tech in terms of data localization, data privacy, data sovereignty, etc.

India’s stand on the US’s action:

  • India has said that, it will examine the proposed action with the stakeholders concerned and would take suitable measures, keeping in mind the trade and commercial interest of India and its people.

Conclusion:

  • Something has to be developed at International level with consensus because the kind of dialogue has been seen in last one year specifically, the 2021 should see some sort of compromise being reached on it.

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