In recent news, the United States Trade Representative (USTR) has begun investigations into taxes being considered or already implemented by 10 countries, including India. These taxes apply to the income of American digital service firms such as Airbnb and Netflix, and are known generically as Digital Services Taxes (DSTs).
The Role of The United States Trade Representative
The United States Trade Representative is the body in charge of developing and coordinating US foreign trade interests. Using its Section 301 authority, the USTR can investigate any actions by foreign nations that may be discriminatory or unfair, and which may negatively impact US commerce. Established through the 1974 Trade Act, Section 301 allows the US President to impose tariffs or other restrictions on foreign nations. However, consultations with these trading partners are mandatory.
What Are Digital Service Taxes (DSTs)?
Digital Service Taxes refer to taxes levied on the revenues of specific companies that derive substantial quantities of revenue from providing certain digital services. Key examples include digital multinationals such as Google, Amazon, and Apple. The Organisation for Economic Cooperation and Development (OECD) is currently holding discussions with over 130 countries in an attempt to modernize the international tax system. A key objective of these negotiations is tackling the taxation difficulties associated with digital economy. However, it is important to note that critics argue that tax policies designed to target a single sector or activity are likely to have complex outcomes and might be inherently unfair. Separating the digital economy from the global economy is not straightforward.
India’s Tax On Digital Companies
The US is currently examining the 2% Digital Services Tax (DST) that India implemented in March 2020, which took effect on April 1, 2020. This tax applies only to non-resident companies with annual revenues of more than $267,000. It covers the online sale of goods and services to people in India. Moreover, a 6% equalisation levy has been in place since 2016 on payments exceeding Rs. 1 lakh per year to non-resident service providers for online advertisements. This covers e-commerce companies that derive revenue from Indian customers without having any tangible presence in India.
The United States’ Perspective
The US has expressed concern that a number of its trading partners are creating tax schemes specifically designed to target US-based companies unfairly. These concerns arise particularly because several countries are beginning to take unilateral measures in the absence of multilateral consensus led by the OECD. US tech firms, which have enjoyed global success, are facing the negative impacts of these unilateral measures, prompting this investigation.
India’s Chance to Respond
India will be given an opportunity to negotiate with the US to prevent the enforcement of tariffs. India is expected to argue that the levy complies with India’s commitments under the 1995 General Agreement on Trade in Services, as it applies to all multinational corporations, not just American ones.
Concerns and Implications
This move could signal the start of more unilateral action by the US, especially concerning digital services, amidst the improper functioning of the World Trade Organization (WTO). For India, this investigation could potentially impact the resolution of a bilateral trade deal that India has been attempting to establish with the US.
The Way Forward
As India is rapidly developing into a digital powerhouse, it is important for India to negotiate its 2% DST to prevent any barriers to its implementation. Furthermore, there should be an international agreement on taxation on the digital economy.
