The office of the United States Trade Representative (USTR) is initiating investigations into taxes adopted or under consideration by 10 nations, including India, on revenues of American digital service companies like Netflix, Airbnb, Uber, LinkedIn and Spotify.
In India’s case, it could potentially affect the outcome of a bilateral trade deal that the NDA government has been looking to forge with the US. New Delhi is expected to respond to the move by submitting its responses to the USTR, with the main line of argument likely to be that the levy is in compliance with India’s commitments under the 1995 General Agreement on Trade in Services and is applicable on all global companies, not just American ones.
While still in its initial stages, experts said that in the backdrop of an increasingly crippled World Trade Organization (WTO), the move could signal the start of more unilateral action by the Donald Trump administration, especially on the digital services front.
“Over the past two years, various jurisdictions have taken under consideration or adopted taxes on revenues that certain companies generate from providing certain digital services to, or aimed at, users in those jurisdictions. They are referred to as Digital Services Taxes, or DSTs. Available evidence suggests the DSTs are expected to target large, US-based tech companies,” stated the USTR’s Federal Register Notice dated June 2. As per the notice, the US is probing the 2 per cent DST that India adopted in March and which went into effect on April 1.
The tax applies only to non-resident companies with annual revenues over $267,000, and covers online sales of goods & services to, or aimed at, persons in India. The investigation, officials said, has been initiated against other key trading partners of the US and is merely a first step.
“President Trump is concerned that many of our trading partners are adopting tax schemes designed to unfairly target our companies,” said USTR Robert Lighthizer. “We are prepared to take all appropriate action to defend our businesses and workers against any such discrimination.”
“The USTR report is just a first step. The US law mandates consultations with trading partners as and when a Section 301 investigation is initiated. India will also be accorded an opportunity to negotiate with the US and prevent the imposition of tariffs by reaching a comprehensive outcome, one the line of similar negotiations that are currently underway with France,” a senior government official told The Indian Express.
The Section 301 provision gives the USTR “broad authority” to investigate and respond to a foreign country’s action which may be “unfair” or “discriminatory” as well as negatively affect US commerce. Adopted in 1974, it allows the US President to impose tariffs or other curbs on foreign nations.
India — in amendments to the Finance Act, 2020 in March-end — had expanded the ambit of the equalisation levy for non-resident e-commerce operators involved in supply of services, including online sale of goods and provision of services, with the levy at the rate of 2 per cent. Equalisation levy at 6 per cent has been in force since 2016 on payment exceeding Rs 1 lakh a year to a non-resident service provider for online advertisements. This is applicable for e-commerce companies that are sourcing revenue from Indian customers without having tangible presence here in the country.
“India seems to be within WTO rights to impose this DST, as it does not violate its commitments under the services agreement under the organisation. However, given the growing importance of electronic services in global trade, this investigation could set the stage for more such action by the US,” said Jayant Dasgupta, former Permanent Representative of India to the WTO.
“We can expect more such investigations now, because it seems to be a part of the American strategy to adopt the unilateral route after making multilateral organisations like the WTO almost redundant,” said Biswajit Dhar, professor at JNU’s Centre for Economic Studies and Planning.
The expansion of equalisation levy through the amendments in the Finance Act, which came into effect from April 1, are seen to have been implemented in a rush and without adequate consultation, tax experts said, adding that any abeyance or any clarification on this issue from the government will have to come before the payment of the first instalment of the levy which is due on July 7.
“Several countries in the world are adopting unilateral measures in the absence of a multilateral consensus spearheaded by OECD. We don’t foresee global consensus happening anytime soon. US tech companies which have been phenomenally successful globally are facing the brunt of these unilateral measures and therefore this investigation. One has to keep in mind that typically in case when the goods and services are supplied to the resident, typically the non-residents have been able to pass on the burden to the Indian consumers and therefore indirectly the tax has been borne by the Indian consumers,” Amit Maheshwari, partner, AKM Global said.
“India’s equalisation levy brings with itself, complex questions and ambiguities, including the possibility of double taxation of income in absence of access to foreign tax credit as per tax treaties…the current investigation has invited public comments and will primarily deal with issues like unreasonableness of tax policies, diverging provisions from US tax laws, extraterritorial rights and whether the digital tax mechanism is being used to penalise technology giants for their atypical success graph or for being crisis-proof in current times. India is racing towards becoming a digital giant, and one needs to wait to see if the details of this new levy would be negotiated to avoid any hurdles in its implementation,” Sandeep Jhunjhunwala , Partner, Nangia Andersen LLP said.
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