Digital tax: India may face retaliatory tariffs by the US on slew of items in November
Experts are of the opinion that the tariffs may have a very limited impact on Indian exports and overall economy, considering limited significance of these items in India's export basket.
- Oct 22, 2021,
- Updated Oct 22, 2021 7:49 PM IST
India may face retaliatory tariffs by the United States next month over the 2 per cent digital tax on foreign technology majors, with New Delhi not joining the agreement to immediately restrict use of unilateral measures in light of the global digital taxation deal finalised by 136 countries at the Organization of Economic Cooperation and Development (OECD) earlier this month.
The office of the US Trade Representative (USTR) had in June decided to suspend by 180 days additional tariffs of up to 25 per cent ad valorem on aggregate level of trade on a slew of items including basmati rice, sea food, bamboo, semi-precious stones, and pearls, hoping for a multilateral solution on the issue of digital taxation at OECD.
However, experts suggested that the tariffs may have a very limited impact on Indian exports and overall economy, considering limited significance of these items in India's export basket and demand inelasticity for most on the list. Besides, the tariffs against India are aimed to mop up around $55 million, which is as much as what India will collect from US companies through the 2 per cent equalisation levy, US has estimated. This translates into merely Rs 400 crore annually, which is about an eighth of the over Rs 3000 crore estimated to be collected by India this year through EL.
The 40 tariff sub-heads that may attract tariffs after six months include Rattan furniture and parts, precious stone articles, gold rope necklaces and neck chains, cultured pearls, yarn, cigarette paper, and corks and stoppers.
While there was an understanding at the October 8 deal that the unilateral measures will go only when the global agreement will get implemented by 2023, US has entered into an agreement with Austria, Italy, Spain, United Kingdom, and France for an interim period. The agreement will make the unilateral levies in the form of digital services taxes accrued to the US companies in the interim period creditable against future income taxes accrued under Pillar 1 of the global pact. In turn, US has decided to terminate the Section 301 trade actions in the form of tariffs against these countries. The Pillar 1 of the multilateral solution would ensure that these large multinational digital entities such as Microsoft, Google, Facebook, and Adobe pay more taxes in countries where they have customers or users, regardless of where they operate from.
Meanwhile, India has decided not to be a part of the agreement and wants to continue with the equalisation levy and not make the excess tax revenues (beyond what is accrued under Pillar 1 in the 1st year of implementation) creditable against future taxes accrued under the multilateral pact.
The US had also decided to impose suspended tariffs on six other countries ---- Austria, Italy, Spain, Turkey, and the United Kingdom over the digital services tax imposed by them.
"Turkey and India, the other two countries covered by the DST investigations, have not joined in the agreement," US said in a statement on Thursday.
India's equalisation levy has a much lower annual revenue threshold of Rs 2 crore (Euro 0.2 million) as against Euro 20 billion under the Pillar 1 of proposed OECD tax deal. The OECD deal only covers the top 100 global companies with profit reallocation of only 25 per cent of non-routine profits, defined as in excess 10-per cent margin. The OECD has estimated that developing countries are expected to gain an additional 1 per cent of corporate income tax (CIT) revenues, on average, which roughly translates into Rs 5000-6000 crore in case of India.
"Under the Unilateral Measures Compromise, Austria, France, Italy, Spain, and the United Kingdom, countries which have all enacted Unilateral Measures before October 8, 2021, are not required to withdraw their Unilateral Measures until Pillar 1 takes effect. However, to the extent that taxes that accrue to Austria, France, Italy, Spain, and the United Kingdom with respect to existing Unilateral Measures during a defined period after political agreement is reached (October 8), and before Pillar 1 takes effect, exceed an amount equivalent to the tax due under Pillar 1 in the first full year of Pillar 1 implementation…such excess will be creditable against the portion of the corporate income tax liability associated with Amount A as computed under Pillar 1 in these countries,…", the statement said.
Suranjali Tandon, Assistant Professor, National Institute of Public Finance and Policy (NIPFP), said that the US' agreement with UK, Spain, and Austria that the DSTs collected in excess of tax liability due under Pillar 1 in exchange for abandoning the retaliatory tariffs is a way to ensure that countries get as much today as is agreed under the consensus framework.
"But the US' announcement suggests that India may rightfully so want to calibrate the withdrawal of EL, especially since the deal is a long way from final. Even if the US decides to impose a tariff on Indian exports, many of these goods are not significant items of exports and where the demand is inelastic the tariff may end up hurting US consumers," added Tandon.
Sandeep Jhunjhunwala, partner, Nangia Anderson LLP said that with the 180 days for suspension of additional tariffs soon to expire, comments are awaited from both India and the US.
"Based on strong trade relationships between the countries, a negotiation plan may be on the table, but the levy of additional tariffs cannot be entirely ruled out at this stage," said Jhunjhunwala.
Finding India's equalisation levy, "actionable" under Section 301 of the Trade Act for being unreasonable, burdensome, and discriminatory against American companies like Amazon, Google, and Facebook, and inconsistent with international tax principles, the US had decided to impose tariffs against Indian goods.
India in April 2020 widened the scope of the equalisation levy scope to impose 2 per cent tax on non-resident e-commerce players with a turnover of Rs 2 crore. It earlier only applied to digital advertising services till March 2020 at the rate of 6 per cent.
Also Read: Global digital tax: Will India benefit from G7's proposal?
Also Read: How sustainable is India's trade and why does it matter to global markets?
India may face retaliatory tariffs by the United States next month over the 2 per cent digital tax on foreign technology majors, with New Delhi not joining the agreement to immediately restrict use of unilateral measures in light of the global digital taxation deal finalised by 136 countries at the Organization of Economic Cooperation and Development (OECD) earlier this month.
The office of the US Trade Representative (USTR) had in June decided to suspend by 180 days additional tariffs of up to 25 per cent ad valorem on aggregate level of trade on a slew of items including basmati rice, sea food, bamboo, semi-precious stones, and pearls, hoping for a multilateral solution on the issue of digital taxation at OECD.
However, experts suggested that the tariffs may have a very limited impact on Indian exports and overall economy, considering limited significance of these items in India's export basket and demand inelasticity for most on the list. Besides, the tariffs against India are aimed to mop up around $55 million, which is as much as what India will collect from US companies through the 2 per cent equalisation levy, US has estimated. This translates into merely Rs 400 crore annually, which is about an eighth of the over Rs 3000 crore estimated to be collected by India this year through EL.
The 40 tariff sub-heads that may attract tariffs after six months include Rattan furniture and parts, precious stone articles, gold rope necklaces and neck chains, cultured pearls, yarn, cigarette paper, and corks and stoppers.
While there was an understanding at the October 8 deal that the unilateral measures will go only when the global agreement will get implemented by 2023, US has entered into an agreement with Austria, Italy, Spain, United Kingdom, and France for an interim period. The agreement will make the unilateral levies in the form of digital services taxes accrued to the US companies in the interim period creditable against future income taxes accrued under Pillar 1 of the global pact. In turn, US has decided to terminate the Section 301 trade actions in the form of tariffs against these countries. The Pillar 1 of the multilateral solution would ensure that these large multinational digital entities such as Microsoft, Google, Facebook, and Adobe pay more taxes in countries where they have customers or users, regardless of where they operate from.
Meanwhile, India has decided not to be a part of the agreement and wants to continue with the equalisation levy and not make the excess tax revenues (beyond what is accrued under Pillar 1 in the 1st year of implementation) creditable against future taxes accrued under the multilateral pact.
The US had also decided to impose suspended tariffs on six other countries ---- Austria, Italy, Spain, Turkey, and the United Kingdom over the digital services tax imposed by them.
"Turkey and India, the other two countries covered by the DST investigations, have not joined in the agreement," US said in a statement on Thursday.
India's equalisation levy has a much lower annual revenue threshold of Rs 2 crore (Euro 0.2 million) as against Euro 20 billion under the Pillar 1 of proposed OECD tax deal. The OECD deal only covers the top 100 global companies with profit reallocation of only 25 per cent of non-routine profits, defined as in excess 10-per cent margin. The OECD has estimated that developing countries are expected to gain an additional 1 per cent of corporate income tax (CIT) revenues, on average, which roughly translates into Rs 5000-6000 crore in case of India.
"Under the Unilateral Measures Compromise, Austria, France, Italy, Spain, and the United Kingdom, countries which have all enacted Unilateral Measures before October 8, 2021, are not required to withdraw their Unilateral Measures until Pillar 1 takes effect. However, to the extent that taxes that accrue to Austria, France, Italy, Spain, and the United Kingdom with respect to existing Unilateral Measures during a defined period after political agreement is reached (October 8), and before Pillar 1 takes effect, exceed an amount equivalent to the tax due under Pillar 1 in the first full year of Pillar 1 implementation…such excess will be creditable against the portion of the corporate income tax liability associated with Amount A as computed under Pillar 1 in these countries,…", the statement said.
Suranjali Tandon, Assistant Professor, National Institute of Public Finance and Policy (NIPFP), said that the US' agreement with UK, Spain, and Austria that the DSTs collected in excess of tax liability due under Pillar 1 in exchange for abandoning the retaliatory tariffs is a way to ensure that countries get as much today as is agreed under the consensus framework.
"But the US' announcement suggests that India may rightfully so want to calibrate the withdrawal of EL, especially since the deal is a long way from final. Even if the US decides to impose a tariff on Indian exports, many of these goods are not significant items of exports and where the demand is inelastic the tariff may end up hurting US consumers," added Tandon.
Sandeep Jhunjhunwala, partner, Nangia Anderson LLP said that with the 180 days for suspension of additional tariffs soon to expire, comments are awaited from both India and the US.
"Based on strong trade relationships between the countries, a negotiation plan may be on the table, but the levy of additional tariffs cannot be entirely ruled out at this stage," said Jhunjhunwala.
Finding India's equalisation levy, "actionable" under Section 301 of the Trade Act for being unreasonable, burdensome, and discriminatory against American companies like Amazon, Google, and Facebook, and inconsistent with international tax principles, the US had decided to impose tariffs against Indian goods.
India in April 2020 widened the scope of the equalisation levy scope to impose 2 per cent tax on non-resident e-commerce players with a turnover of Rs 2 crore. It earlier only applied to digital advertising services till March 2020 at the rate of 6 per cent.
Also Read: Global digital tax: Will India benefit from G7's proposal?
Also Read: How sustainable is India's trade and why does it matter to global markets?