USTR backs action against India's equalisation levy, finds it burdensome

The report also raised the issue of implementation of the DST by the Indian government in a ‘hasty manner’, which exacerbated the compliance challenges for affected companies.
The US has held that India’s digital tax (2 per cent) on technology majors is unreasonable, burdensome, and discriminatory against

American companies like Amazon, Google, and Facebook, and inconsistent with international tax principles.

The office of the US Trade Representative (USTR) has noted that India’s digital services tax (DST), or equalisation levy, was “actionable” under Section 301 of the Trade Act, which may mean relatiatory tariffs on Indian products.

The report, based on a Section 301 probe initiated in June last year, found India’s equalisation levy to be inconsistent with international tax principles because it failed to provide tax certainty, targeted revenues unconnected to a physical presence in India, and applied to revenue rather than income.

Highlighting the supposed discrimination, the report said of the companies that were subjected to India’s equalisation levy, 72 per cent were American.

“The USTR’s investigation would support a finding that India’s DST is actionable under Section 301,” the USTR report said.

India responded on Thursday: "The Government of India will examine the determination / decision notified by the U.S. in this regard, and would take appropriate action keeping in view the overall interest of the nation."

Section 301 of the US Trade Act empowers the USTR to investigate a trading partner’s policy action that may be deemed unfair or discriminatory and negatively affects US companies, and take action, including tariff-based and non-tariff-based retaliation. For instance, last year the US announced a 25 per cent tariff on $1.3 billion worth of French goods, including handbags, cosmetics, and soaps, in retaliation for a 3 per cent digital services tax on internet giants.

“Our investigation would support a finding that the digital services tax (DST) burdens or restricts US commerce by negatively impacting US companies’ operations in India. More specifically … the DST creates a significant new tax burden for US companies, taxes an unusually broad array of digital services, forces US companies to undertake costly compliance measures, and subjects US companies to multiple layers of taxation,” said the USTR in its investigation findings report.

It further alleged the tax violated prevailing international tax principles, and was, therefore, unreasonable.

The report highlighted the USTR’s analysis identified 119 companies that were likely to have been subject to DST. Of those 86 (72 per cent) are US companies. China and the United Kingdom followed with seven companies each, France had six, and Japan five.

Besides, India’s tax covers a broader scope of services than other DSTs adopted around the world , expanding the universe of US companies subject to DST, and increasing the tax burden US companies face, it said.

India had, through an amendment in the Finance Bill 2020-21, imposed a 2 per cent digital tax on trade and services offered by non-resident e-commerce operators with a turnover of over Rs 2 crore, expanding the scope of the equalisation levy, which till last year only applied to digital advertising services. The new levy came into effect on April 1. E-commerce operators must pay the tax at the end of each quarter.

The USTR report further pointed out India’s DST burdened US companies by subjecting them to double or in some cases multiple layers of taxation.

“US companies that pay the DST in India will still be subject to US corporate income tax, creating two layers of taxation,” the report said.

The report also raised the issue of the Indian government putting into effect DST in a “hasty manner”, which exacerbated the compliance challenges for affected companies.

The USTR report said commentators estimated that compliance costs for India’s DST would be “in the millions” for each company, and “the administrative burden associated with compliance is significant, even if firms can pay the tax”.

The US had launched a probe against nine others, including Austria, Brazil, Indonesia, Italy, Spain, and Turkey, for levying or considering DSTs. The USTR has also slammed Turkey and Italy for the 'discriminatory' DST in its final report, while investigation is still on for other countries.

The Internet Association, representing Google, Amazon, Facebook, and Ebay, in its comment to the USTR over the Section 301 investigation, had pressed for retaliatory action against India for DST, arguing that the equalisation levy was unreasonable and discriminated against US companies.

However, IBM, the US Chamber of Commerce (USCC), and the Consumer Technology Association (CTA), along with Adobe, 3M, and Accenture, had opposed retaliatory tariffs, arguing that they will only hurt American companies and had urged the USTR to work towards a multilateral solution on the issue.

India had defended the levy as “non-discriminatory” in its comment on the Section 301 investigation and said it was fully consistent with World Trade Organization rules and international taxation agreements. Sandeep Jhunjhunwala, partner, Nangia Anderson LLP, said it was unlikely that the USTR investigation report would deter the government from continuing with the levy.

“It will be interesting to see what measures the governments take to resolve the issue bilaterally. Given the political condition in the US, it is likely that Washington may not take any extreme steps against India as it did with France on the DST tussle,” he said.

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