MUMBAI: Digital services taxes (DSTs) adopted by India, Italy and Turkey discriminate against US companies, are inconsistent with the currently prevailing principles of international tax and burden or restrict US companies.
These are the findings of the office of the US Trade Representative (USTR) that were recently made public, pursuant to an investigation carried out under section 301 of The Trade Act, 1974.
In particular, USTR’s report points out that: “India’s DST is an outlier. It taxes numerous categories of digital services that are not leviable under other DSTs adopted around the world. This brings more US companies within the scope of the DST, and makes the measure significantly more burdensome.”
USTR has also undertaken similar investigations with respect to the DSTs adopted or under consideration by Austria, Brazil, the Czech Republic, the European Union, Indonesia, Spain, and the United Kingdom. The reports relating to these countries are awaited.
USTR, in its statement, adds that it is not taking any specific actions in connection with the findings at this time but will continue to evaluate all available options.
Let us take a step back in time. On July 10, last year, US announced imposition of an additional 25% import tariff on imports of a wide range of luxury products from France. This was pursuant to a similar investigation undertaken by the USTR.
The trade value of these imports of cosmetics, soaps, handbags et all, was estimated at $ 1.3 billion. The tariff imposition was kept in abeyance for a 180 period (ie: up to January 5, 2021) to enable negotiations between the two countries.
Pending ongoing investigation of DSTs adopted or under consideration in other countries, USTR has suspended the tariff action to promote a coordinated response in all its Section 301 investigations.
While the path that India will adopt is not immediately known, it is unlikely that India will budge on its stand that its Equalisation Levy (EL) aka digital services tax is unequitable. In this backdrop, the Indian government will need to gear up for some hard negotiations.
While, imposition of additional tariffs by the US on imports from India and other countries that have introduced DSTs cannot be ruled out sometime in the future, India will not be alone in this war.
India the first mover:
International tax laws were designed for the traditional economy which required a physical presence (permanent establishment as it is defined in tax treaties) in the country where the goods and services were sold. In a unilateral move, owing to lack of consensus at an international level, India introduced an EL from June 1, 2016.
Under it, an Indian payer is required to deduct 6% on payments (if in excess of Rs 1 lakh a year) to a non-resident for online advertisements. While this is ostensibly a levy on the non-resident entity (say Google, or Facebook), the actual burden of such levy shifted to the B2B customer by way of higher charges.
In financial year 2017-18, which followed its introduction, the collections under equalisation levy exceeded Rs 550 crore. Recent news reports cite that Google has paid around Rs 604 crore, as equalisation levy during the fiscal 2019-20.
However, the scope of the section 301 investigation was focussed on the 2% EL introduced by the Finance Act, 2000, with effect from April 1. It covers non-resident e-commerce operators who have to pay this levy on the consideration received for online sale of goods or services.
It covers both B2B and B2C transactions but does not apply where the sales, turnover or gross receipts of the non-resident entity is less than Rs 2 crore in a fiscal year.
While the collection from this 2% EL will be known only after the current fiscal ends, USTR estimates that the aggregate tax bill for US companies could exceed $30 million per year.
Apart from pointing out the broad scope of the 2% EL, USTR in its report also pointed out that the overwhelming majority of companies subject to this levy are US companies. Of the 119 companies that USTR was able to identify who were likely to bear this levy 86 companies (or 72%) were US companies, followed by China and UK (7 companies), France (6 companies) and Japan (5 companies). US companies bear the greatest burden of India’s discriminatory approach, it concluded.
USTR pointed out that India had not set a global revenue threshold for the purpose of the levy. The domestic threshold of Rs 2 crore ($267,000 approximately) was also perceived as low, by USTR. It emphasised that both these aspects would bring within the ambit of EL, several companies which do very little business with India.
EL levels the playing field, says India:
The US investigation on the 2% EL included whether the EL discriminated against the US companies, whether it was applied retrospectively, and lastly whether it diverged from US or international tax norms due to its applicability on entities not resident in India.
A statement from the ministry of commerce & industry in response to the USTR findings states: In this regard, the US requested for consultations and India submitted its comments to the USTR on July 15, 2020. It also participated in the bilateral consultation held on November 5, 2020, where it emphasised that the EL is not discriminatory.
It was explained that on the contrary EL seeks to ensure a level-playing field with respect to e-commerce activities undertaken by entities resident in India who are already subject to taxes in India on the revenue generated from the Indian market, and those that are not resident in India, or do not have a permanent establishment in India.
The EL levied at 2% is applicable on all non-resident e-commerce operators irrespective of their country of residence, who do not have a permanent establishment in India. The threshold for this levy is Rs 2 crore, which is very moderate.
It was also clarified that the EL 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.
In addition, it was pointed out that EL was one of the methods suggested by the OECD/G20 Report on Action 1 of BEPS Project (2015), which was aimed at tackling the taxation challenges arising out of digitisation of the economy.
EL is a recognition of the principle that in a digital world, a seller can engage in business transactions without any physical presence, and governments have a legitimate right to tax such transactions, added the ministry’s statement.
Given that a global consensus at the OECD or even the UN level may take several more months, countries including India, are likely to continue with their unilateral DSTs. At this juncture, when economies are reeling under the ill-effects of the pandemic, no country would want to give up its share of revenue and wait for a global consensus to emerge.
That said, India can address certain issues that non-resident taxpayers are facing in complying with the EL. Ease of compliance and payment will go a long way in showcasing that it is not only easy to do business in India but with India.