The Office of the United States Trade Representative (USTR) has recently expressed concerns over the Digital Services Taxes (DSTs) implemented by India, Italy, and Turkey. The USTR holds the view that these taxes, aimed at revenues generated by digital services companies, are unfair to US firms and conflict with international tax principles.
About the United States Trade Representative (USTR)
The USTR is an agency responsible for shaping and supervising international trade policy in the US. Under Section 301 of the US Trade Act, the USTR has considerable authority to scrutinize and challenge foreign policies that it perceives as discriminatory or detrimental to US commerce.
Digital Services Taxes (DSTs) Explained
DSTs are taxes levied on revenues generated by select digital services providers, including tech giants such as Google, Amazon, and Apple. At present, the Organisation for Economic Cooperation and Development (OECD) is orchestrating talks with over 130 nations to modify the international tax system, addressing challenges posed by the digitalized economy.
India’s Taxation Policy for Digital Companies
The Indian government expanded the scope of the equalisation levy in the Finance Bill 2020-21 with a 2% DST on trade and services provided by foreign e-commerce operators earning over Rs. 2 crore. Previously, this levy targeted revenues from business-to-business digital advertisements. The new levy has been effective since April 1, 2020, with e-commerce operators required to pay the tax quarterly.
Findings of the USTR’s Investigation Report
USTR argues that India’s DST discriminates against non-Indian companies, especially U.S. technology businesses which form a substantial part of the industry. According to USTR, out of 119 companies likely subjected to the DST, 72% are American. USTR’s estimations suggest that this tax could cost US companies more than USD 30 million yearly.
India’s Response to USTR’s Claims
India defends its equalization levy as a fair and non-discriminatory tax applicable to all offshore digital firms operating in the local market. The government denies allegations of targeting US companies. India contends that the levy ensures parity in e-commerce activities conducted by entities residing in India and those based outside the country.
Concerns Raised By USTR’s Position
With the World Trade Organization’s functionality under question, USTR’s actions could pave the way for more unilateral moves by the US, particularly relating to digital services. For India, such investigations could potentially affect its prospects of securing a bilateral trade agreement with the US.
Looking Ahead
As India strives to expand its digital economy, it must negotiate regarding the 2% DST to prevent any hitches in its application. Additionally, an international consensus on taxing the digital economy is crucial to avoid such conflicts in the future.
