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New Delhi to examine proposal, plan suitable measures: Digital tax; India among nations likely to face retaliatory US tariff

“The United States is committed to working with its trading partners to resolve its concerns with digital services taxes, and to addressing broader issues of international taxation,” said USTR Ambassador Katherine Tai.

By: ENS Economic Bureau | New Delhi |
March 28, 2021 6:20:46 am
New Delhi to examine proposal, plan suitable measures: Digital tax; India among nations likely to face retaliatory US tariffThe proposal follows investigations by the United States Trade Representative (USTR) into digital services tax (DST) adopted or under consideration in 10 jurisdictions, including India, Indonesia, the UK, Brazil and the EU, on June 2, 2020.

The United States has proposed retaliatory action against India’s digital services taxation of e-commerce operators that include levying tariffs. New Delhi has said it will examine the proposed action and take “suitable measures” keeping its own trade and commercial interests in mind.

The proposal follows investigations by the United States Trade Representative (USTR) into digital services tax (DST) adopted or under consideration in 10 jurisdictions, including India, Indonesia, the UK, Brazil and the EU, on June 2, 2020. The investigations were initiated under section 301 of the US Trade Act, 1974.

In January, the USTR issued reports on DSTs adopted by India, Austria, Italy, Spain, Turkey and the UK following “comprehensive investigations”, including consultations with the countries subject to investigation and consideration of public comments.

In the case of India, the USTR’s proposed course of action includes additional tariffs of up to 25 per cent ad valorem on an aggregate level of trade that would collect duties on goods of India in the range of the amount of DST that India is expected to collect from US companies. Around 40 goods are in the preliminary list of products that would be subject to the additional tariffs.

This includes shrimps, basmati rice, cigarette paper, cultured pearls, semi precious stones, silver powder and silver articles of jewelry, gold mixed link necklaces and neck chains and certain furniture of bentwood.

“Initial estimates indicate that the value of the DST payable by US-based company groups to India will be up to approximately $55 million per year,” stated the USTR’s report.

“In January, USTR found that the DSTs adopted by Austria, India, Italy, Spain, Turkey, and the United Kingdom were subject to action under Section 301 because they discriminated against US digital companies, were inconsistent with principles of international taxation, and burdened US companies,” the office of the USTR said.

“The United States is committed to working with its trading partners to resolve its concerns with digital services taxes, and to addressing broader issues of international taxation,” said USTR Ambassador Katherine Tai. “The United States remains committed to reaching an international consensus through the OECD process on international tax issues. However, until such a consensus is reached, we will maintain our options under the Section 301 process, including, if necessary, the imposition of tariffs,” stated the office of the USTR.

The NDA government had moved an amendment in the Finance Bill 2020-21 imposing a 2 per cent digital service tax on trade and services by non-resident e-commerce operators with a turnover of over Rs 2 crore, effectively expanding the scope of equalisation levy that, till last year, only applied to digital advertising services. The new levy came into effect from April 1. E-commerce operators are obligated to pay the tax at the end of each quarter.

“Government of India will examine the proposed action with the stakeholders concerned and would take suitable measures keeping its trade and commercial interest of the country and overall interest of its people,” said a source from the Ministry of Commerce and Industry.
“India made a strong case that the equalization levy (EL) is not discriminatory and only seeks to ensure a level-playing field with respect to e-commerce activities undertaken by entities with permanent establishment in India. It was also clarified that the EL was applied only prospectively, and has no extra-territorial application, since it is based on sales occurring in the territory of India through digital means,” the source said.

“India based e-commerce operators are already subject to taxes in India for revenue generated from Indian market; however, in the absence of the EL, non-resident e-commerce operators (not having any Permanent Establishment in India but significant economic presence) are not required to pay taxes in respect of the consideration received in the e-commerce supply or services made in the Indian market,” the person said.

“The purpose of the Equalization Levy is to ensure fair competition, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations. 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,” the source added.

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