Responding to the US Trade Representative (USTR) probe against India's newly introduced 2 per cent equalisation levy on e-commerce supply and services, the government of India has said that the tax is neither discriminatory nor extra-territorial. The Indian government has also said that levy is prospective in nature and not retrospective.
The government in its response has expressed regret at the initiation of probe. In its response, the government says that India reassures the United States that the equalisation levy is entirely consistent with India's commitments under the WTO and international taxation agreements. It says that far from targeting any US company or companies, the purpose of the equalisation levy is to ensure greater competitiveness, fairness, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations.
The Indian government has further said that it would be happy to provide any clarifications as may be required by the USTR in these proceedings or in bilateral discussions under Section 303(a) of the United States Trade Act, 1974.
The US Trade Representative last month initiated investigation against 10 countries (including India), which have introduced digital tax, also popularly called Google Tax, in some or the other form. The US concern is that these countries are targeting US tech giants like the Google and Amazon with these taxes. The US also pulled out of the negotiations with European countries recently on the issue of digital tax .
Explaining that India's equalisation levy does not discriminate against non-resident e-commerce operators, the Indian government's response to the US says that the underlying policy objective and application of India's equalisation levy is to ensure that neutral and equitable taxation is applicable to e-commerce operators that are resident in India or have a physical presence in India and those that are not resident in India.
"The purpose is to ensure a level-playing field with regard to e-commerce activities undertaken in India. This, in fact, is the very antithesis of the underlying apprehensions listed out in the USTR's Section 301 DST Initiation," says the government in its reply.
In its response to the USTR probe, the government also seeks to alleviate the fear of the US government that the equalisation levy is extra-territorial in nature. It says that the OECD's BEPS Report on Action 1 has clearly brought out tax challenges arising from the digitalisation of the economy, and that the physical presence nexus in existing international taxation rules, which were developed in the last century keeping in view the business models of that time, is no longer the only justifiable indication of nexus. India's equalisation levy, says the government, is a consequence of that understanding.
It further argued that the Supreme Court of the United States in a recent ruling in a case relating to taxation has held that physical presence is not required for the levy of sales tax by a state where the online seller has no physical presence but makes online sales to buyers of the state. The principle under the United States' legal framework is clearly along the same lines as that of India, which is that, in a digitalised world, a seller can engage in business transactions without any physical presence.
The Indian government also assured the US government that there is no retroactive element in the equalisation levy. The levy was enacted before April 1, 2020, which is the date when it was made effective.
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