The United States Trade Representative (USTR) conducted a public hearing to decide its action against India’s Digital Service Tax (DST) on May 10, 2021.[i]The USTR investigation, conducted last year, under section 301, found India’s DST to be unfair, discriminatory and against the US business interest. Pursuant to this, USTR proposed to impose additional tariffs of up to 25 percent on Indian export to the US of 40 select items.[ii]However, on June 02, 2021 the USTR decided to suspend the additional tariffs for the next 180 days[iii].In this context, this article attempts to assess the damage Indian export will face if the US imposes this additional duty. It will also discuss if India retaliates, would it lead to a trade war keeping the technology sector at the forefront?
India’s DST imposes a 2per cent tax on foreign companies earning yearly revenue of INR 20 million or more from the Indian market without having any local establishment through a broad range of digital services. This includes digital platform services, digital content sales, digital sales of a company’s own goods, data-related services among others. Pertinently, India is one of the first countries to introduce a 6per cent Equalisation Levy (EL)in 2016, but the levy was restricted to online advertisement services. Later, vide the Finance Act 2020 it was reduced to 2per cent while broadening the tax net and referring to it as DST.[iv]
Addressing the concern of the US businesses, USTR initiated an investigation on June 2, 2020 and found DST to be discriminatory primarily on three distinct grounds. First it stated that the DST discriminates against US digital businesses because it explicitly excludes Indian digital businesses. Second, the report found that the DST unreasonably contravenes international tax principles. The levy does not extend to identical services provided by non-digital service providers to the same customer. Third, India’s DST heavily burdens or restricts US commerce.[v]
Analysing the USTR findings, it can be noticed that it misses or ignores some important aspects of India’s DST. First, the DST is levied not only to the US companies; rather it is applied to any foreign company offering digital services in India. Hence it is unreasonable to make such a claim. Indian firms or a foreign firm having a permanent establishment in India is liable to pay corporate tax and are kept out of the DST ambit. Similarly, companies offering identical services through non-digital mode are also liable to pay corporate tax. Thus it is very much reasonable to tax the digital service providers who are remotely offering their large range of services in Indian market. Considering the exponential growth of digital services (e.g. Netflix, Amazon Prime video etc.) in recent times, it is of utmost necessary to tax them and create a level playing field for the domestic players.
The US allegation that DST unreasonably contravenes international tax principles suffers from serious shortcomings. It is important to understand that there is no multilateral consensus reached on this critical issue till now. Discussion is underway at the Organisation for Economic Co-operation and Development (OECD). Further, imposing such a tax is also consistent with India’s commitment to the World Trade Organisation (WTO). Further, the US Supreme Court, in a recent ruling, also validates imposing a tax similar to DST[vi]. Hence, it will be unfair by the US, claiming Indian tax as unreasonable and discriminatory while protecting its own tax framework.
Now, if the US rejects all the above arguments and imposes proposed additional tariffs on Indian exports, it will definitely hamper Indian business to a certain extent. The US is a significant market for Indian exports for the items like shrimp, blinds, bamboo products, gold jewellery and furniture and these may face an additional tax burden. As the competition for these items is quite high, Indian exporters will be heavily impacted. Imposing such tariffs is also crucial considering the US-India relations. This action by the US may incite India to impose retaliatory tariffs on US exports to India. This may possibly pave the way for a trade war-like situation. It has the potential to impact other sectors of the economy along with the digital sector. This will be harmful to not only the US and India but also for the global economy, which is going through a very patchy road since the beginning of the US-China trade war in 2018. The global economy is further shrunk due to the outbreak of COVID-19 and subsequent nationwide lockdown in almost every part of the world. Hence, the authorities in USTR should understand that imposing an additional volume of tariff is not going to solve the problem and instead will complicate the things. The USTR should also realise that it is not only India, a handful of countries are levying or planning to levy such tax on digital transactions. Therefore, the US should engage in global talks and reach an agreement on digital taxation while protecting the US business interests. It is in the interest of not just US business but the global business.
*Rahul Nath Choudhury, Research Fellow, Indian Council of World Affairs
Disclaimer:Views expressed are personal
[i]USTR Announces Next Steps of Section 301 Digital Services Taxes Investigations. USTR Press release dated 26.3.2021 Available at: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/march/ustr-announces-next-steps-section-301-digital-services-taxes-investigations Accessed on 28-4-2021
[ii]USTR Section 301 InvestigationReport on India’s Digital Services Tax. Available at https://ustr.gov/sites/default/files/enforcement/301Investigations/Report%20on%20India%E2%80%99s%20Digital%20Services%20Tax.pdf Accessed on 20-4-2021
[iii]USTR (June 02,2021) USTR Announces, and Immediately Suspends, Tariffs in Section 301 Digital Services Taxes Investigations. Available at: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/june/ustr-announces-and-immediately-suspends-tariffs-section-301-digital-services-taxes-investigations Accessed on 15.06.21
[iv]The Finance Act 2020. Ministry of Finance, Government of India. Available at http://egazette.nic.inhttps://www.icwa.in/WriteReadData/2020/218938.pdf Accessed on 21-4-2021
[v]USTR Section 301 InvestigationReport on India’s Digital Services Tax. Available at https://ustr.gov/sites/default/files/enforcement/301Investigations/Report%20on%20India%E2%80%99s%20Digital%20Services%20Tax.pdf Accessed on 20-4-2021
[vi]India’s Response to USTR Notice under S.301. Available at: https://www.medianama.com/wp-content/uploads/Government_of_India_Written_Submission_Section_301_DST.pdfAccessed on 21.04.21