Digital services tax. India believes US has no ground for retaliation

The US may soon come up with the result of its investigation against India, Austria and some others for considering or imposing digital services tax on non-resident internet companies such as Facebook and Google, but India believes any retaliatory action by Washington would be in violation of World Trade Organisation (WTO) rules.

“There is no official intimation, but there is some indication that the US may come out with the findings of the Section 301 investigations initiated against India and some others for digital services taxes on non-resident e-commerce that may affect American companies. India has already clarified that its taxes are not against WTO rules and if trade action is taken by the US, it would be in violation of multilateral trade norms,” an official keeping track of the matter told BusinessLine .

The US Trade Representative (USTR) office had started investigations against India, Austria, Italy, the EU, Brazil, the Czech Republic, Indonesia, Spain, Turkey, and the United Kingdom, in June 2020 for taxing non-resident e-commerce companies or imposing digital services taxes on them. India was included in the countries being investigated as it had announced a two per cent tax, called an equalisation levy, on all non resident e-commerce companies that sell more than ₹2 crore ($267,000) of in-scope goods or services to Indian customers in the Union Budget for 2020-21. The investigations were authorised by Washington under Section 301 of the Trade Act of 1974 (of the US), which empowers the President to levy tariffs and other import restrictions whenever a foreign country imposes unfair trade practices that affect US commerce.

“Now that the results of the Section 301 investigations may be finalised, there are some chances that the US may announce retaliatory duties as it did in the case of France last year. But India is very clear about the fact that the tariffs on non-resident companies announced in the Union Budget are very much in line with India’s commitments at the WTO,” the official said.

‘US concerns unfounded’

India had earlier explained that the US concerns were unfounded as the idea behind India’s equalisation levy was not to be unfair to foreign companies but to ensure that neutral and equitable taxation is applicable to e-commerce operators that are resident in India or have a physical presence in India and those that are not resident in India.

Some trade experts further explain that since India has not taken on commitments to provide national treatment to foreign internet companies under GATS (the services agreement of the WTO), it need not worry about any violations. If the US threatens India and the other countries with retaliatory tariffs on imports in reaction to the digital services tax, then the affected countries can apply more tariffs on American products as a counter-retaliation because the US action would not be justified, the official explained.

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