USTR: India’s equalisation levy is discriminatory, burdens firms

The United States Trade Representative (USTR) has termed India’s Equalisation Levy (also known as Google Tax) on e-commerce companies as ‘discriminatory’. India, however, has said that it is not discriminatory and it would take appropriate action in the matter keeping in view the overall interests of the nation.

“India’s DST (Digital Service Tax, referred as Equalisation Levy in India) is discriminatory, unreasonable, and burdens or restricts US commerce, and thus, is actionable under Section 301 (of Trade Act, 1974),” USTR said in its investigation report. The investigation, initiated by the USTR on June 2 last year, said that this tax explicitly exempts Indian companies and only ‘non-residents’ must pay the tax.

“The DST creates an additional tax burden for US companies. USTR estimates that the aggregate tax bill for US companies could exceed $30 million per year,” the report stated.

Also read: India believes US has no ground for retaliation

New Delhi’s argument is that India-based e-commerce operators are already subject to taxes in India for revenue generated from the domestic market, but in the absence of the equalisation levy, non-resident e-commerce operators (not having any Permanent Establishment in India) are not required to pay taxes in respect of the consideration received in the e-commerce supply or services made in the Indian market.

“The equalisation levy 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,” an official tracking the matter told BusinessLine. India will examine the decision notified by the US in this regard, and would take appropriate action keeping in view the overall interest of the nation, the official said adding “The levy does not discriminate against any US companies as it applies equally to all non-resident e-commerce operators, irrespective of their country of residence.”

Introduced in 2016, the Equalisation Levy, initially was applicable to payments for digital advertisement services received by non-resident companies without a permanent establishment here, if these exceeded ₹1 lakh a year. The rate of tax was 6 per cent. The companies using these services are required to withhold the tax amount.

Also read: FM for ‘consensus solution’ on taxation of digital economy

In the 2020-21 Union Budget, the ambit of the levy was widened by including e-commerce companies. The applicable tax rate is 2 per cent (plus a surcharge) on the amount of consideration received/receivable by an e-commerce operator. This came into effect from April 1.

Here, an e-commerce operator means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both. The law says this levy will not be applicable for any e-commerce operator making/ providing/ facilitating e-commerce supply or services that has a permanent establishment in India and such e-commerce supply or services are effectively connected with such permanent establishment. Also, an operator with annual turnover up to ₹2 crore is exempted from the levy.

The report said that the 2016 digital advertising tax is not the focus of this investigation. Rather, this investigation relates to an expansion of that 2016 tax that the Indian government passed in 2020, which has been referred to as DST, and that is applicable to e-commerce companies. The DST first appeared publicly on March 23, 2020 in amendments to India’s 2020 Finance Act. Companies received no notice of this legislation before that date.

According to the report, just four days later — absent any opportunity for public comment — the DST became law. The tax then went into effect just five days later. To date, the Indian Government has not issued implementing regulations clarifying fundamental aspects of the DST, such as the scope of services covered, companies impacted, etc. India did, however, amend previously existing rules related to the mechanics of how to pay the DST in October 2020, the report mentioned.

Actions authorised under the said section include suspending, withdrawing, or preventing the application of benefits of trade agreement concessions; imposing duties, fees, or other import restrictions on the goods or services of the foreign country; entering into binding agreements that commit the foreign country to eliminate or phase out the offending conduct or to provide compensatory trade benefits; or restricting or denying the issuance of service sector authorisations, which are federal permits or other authorisations needed to supply services in some sectors in the United States.

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