India will defend its recent decision to impose digital services taxes on non-resident e-commerce companies at the unilateral investigation initiated by the US Trade Representative’s office ‘very confidently’ as the taxes were not targeted against American companies and did not violate its commitments at the World Trade Organisation, a government official has said.

“The investigations will be a long-drawn process, possibly lasting several months or even a year. India has its arguments ready defending the tax. The USTR is still collecting public comments on the matter and will start building its case thereafter. We are confident that our submissions defending the taxes (also called equalisation levy) would be convincing as we have not gone against any commitments,” the official told BusinessLine.

In case the USTR decides to impose retaliatory duties on India, as it has proposed to do in case of France, New Delhi can always impose counter duties as the US taxes would be a unilateral measure and not justified under WTO norms, the official added.

Digital services tax

The US Trade Representative’s office has announced that it will start Section 301 investigations against India and nine others, such as Australia, Brazil, Italy, the UK and Czech Republic, for imposing or considering digital services taxes that may affect American companies like Google, Amazon, Apple and Facebook. The Section 301, adopted by the US in 1974, allows the US President to unilaterally impose tariffs or other trade restrictions on foreign countries.

India is being investigated for announcing a two per cent tax (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 Budget for 2020-21, according to the order.

India has not taken any commitments at the General Agreement on Trade in Services, the services agreement of the WTO, that prevents it from imposing taxes on non-resident e-commerce companies, the official said. Moreover, it is not directed against US companies as entities like music streaming company Spotify, based in Sweden, may also be affected.

“This issue of digital MNCs collecting massive advertising revenue from other countries and paying minimal tax at a tax haven has to be sorted out at the G 20 or some such fora soon,” said Jayant Dasgupta, former Indian Ambassador to the WTO.

There is also the related question of the flow of big data across national boundaries and its commercial exploitation. “The ownership of such data is a question which will have to be resolved plurilaterally, if not at the WTO,” Dasgupta said.

The USTR had initiated Section 301 investigation against France in July 2019 after the country imposed a 3 per cent tax on gross revenues generated from providing digital interface services and targeted advertising services. On July 10, the USTR decided to impose 25 per cent duties against certain French products as result of France’s digital services tax but decided to hold further negotiations with the country and delay the tax until January 2021.

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