The US administration has accused that India's digital tax - 2 percent equalisation levy on e-commerce supply of services - discriminates against US companies and is inconsistent with prevailing principles of international taxation, and restricts US commerce.
The findings of the US Trade Representative's investigations of Digital Service Taxes (DSTs) adopted by India, Italy, and Turkey, released on January 6 ruled against the DSTs of all three countries. USTR stated that the agency is not taking any specific actions in connection with the findings at this time but will continue to evaluate all available options.
The agency finds three issues with India's DST, the first being discrimination against US digital services companies. "India's DST is discriminatory on its face. The law explicitly exempts Indian companies, while targeting non-Indian firms. The result is that US "non-resident" providers of digital services are taxed, while Indian providers of the same digital services to the same customers are not. This is discrimination in its clearest form," the report says.
It states that at least three aspects of India's DST unreasonably contravenes international tax principles. "Stakeholders have found the text of the DST to be unclear and ambiguous. This creates uncertainty for companies regarding key aspects of the DST, including the scope of taxable services and the universe of firms liable to pay the tax," the report says.
It also complains that India has published no official guidance to resolve these ambiguities and terms it as a failure to provide tax certainty, which contravenes a core principle of international taxation.
"The DST taxes companies with no permanent establishment in India, contravening the international tax principle that companies should not be subject to a country's corporate tax regime absent a territorial connection to that country. The DST taxes companies' revenue rather than their income. This is inconsistent with the international tax principle that income-not revenue-is the appropriate basis for corporate taxation," the report points out.
The third major complaint raised against India is that its DST is burdensome or restrictive. "The DST creates an additional tax burden for U.S. companies. USTR estimates that the aggregate tax bill for U.S. companies could exceed US$30 million per year", the report said. The DST forces U.S. companies to undertake costly measures to comply with the tax's new payment and reporting requirements. It also subjects US firms to double taxation, the report alleged.
As part of its investigations, the U.S. had requested for consultations and India had submitted its public comments to the USTR on 15 July 2020, emphasizing that the country's digital tax is not discriminatory; but on the contrary seeks to ensure a level-playing field with respect to e-commerce activities undertaken by entities resident in India, and those that are not resident in India, or do not have a permanent establishment in India.
It was also clarified that the levy 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. Incidentally, India based e-commerce operators are already subject to taxes in India for revenue generated from Indian market; however, in the absence of the equilization levy, non-resident e-commerce operators (not having any Permanent Establishment in India) are not required to pay taxes in respect of the consideration received in the e-commerce supply or services made in the Indian market.
Indian officials clarify that the EL levied at 2 percent is applicable on non-resident e-commerce operator not having a permanent establishment in India. They also point out that the threshold for this levy is Rs. 2 crores, which is very moderate and applies equally to all e-commerce operators across the globe having business in India. In short, India's position continues to be that the levy does not discriminate against any U.S. companies as it applies equally to all non-resident e-commerce operators, irrespective of their country of residence.
India also holds the opinon that there is no retroactive element as the levy was enacted before the 1st day of April, 2020 which is the effective date of the levy. "It does not have extra territorial application as it applies only on the revenue generated from India. In addition, EL was one of the methods suggested by 2015 OECD/G20 Report on Action 1 of BEPS Project which was aimed at tackling the taxation challenges arising out of digitization of the economy", an official said.
The Government of India is examining the decision notified by the U.S. for appropriate action keeping in view the overall interest of the nation, the official added.