India denies U.S. claim that its Digital Services Tax is ‘discriminatory’

USTR started investigation in June last year against Equalisation Levy (EL), on the ground of Section 301 of the U.S. Trade Act of 1974.

The tax applied since April 1, 2020 covers all digital transactions in India, including e-commerce supplies by non-resident players.

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India’s Ministry of Commerce and Industry on Thursday denied U.S. claim that its 2% tax on digital services discriminated against the American companies.

India said it will examine the decision notified by the U.S., and take ‘appropriate action’ after U.S. Trade Representative (USTR) investigation report said the country’s Digital Services Tax (DST) is ‘inconsistent with prevailing principles of international taxation, and burden or restricts U.S. commerce’.

USTR started investigation in June last year against Equalisation Levy (EL), on the ground of Section 301 of the U.S. Trade Act of 1974.

The tax applied since April 1, 2020 covers all digital transactions in India, including e-commerce supplies by non-resident players. Besides, the scope of DST was expanded to include transactions that use Indian data if the firm’s revenue from India is Rs. 2 crore and above. The Commerce Ministry considers this levy very moderate and applies it equally on all overseas e-commerce operators doing business in India.

In its detailed report, the office of USTR said the law explicitly exempts Indian companies, and targets non-Indian firms. This impacts U.S technology companies as they are taxed higher than their Indian counterparts. USTR noted that of the 119 companies liable under DST, 86 are U.S. companies.

The tax is levied on companies with no permanent establishment in India, and is applied on a firm’s revenue rather than income. This is inconsistent with the international tax principles, it added.

According to the office’s estimates, the tax creates an additional burden of $30 million per year for the American companies. This is because India levies digital tax on various categories of services that are not taxed in other countries.

In addition to this, USTR said DST increases the compliance cost of companies, which could run into millions.

Taking note of USTR’s report, India said it would take appropriate action keeping in view the overall interest of the nation.

India submitted its comments to the USTR on July 15, 2020 and participated in bilateral consultations in November. It stuck with the fact that Equalisation Levy is not discriminatory. Ministry of Commerce and Industry said it clarified that EL was applied prospectively and has no extra-territorial application.

“The levy does not discriminate against any U.S. companies, as it applies equally to all non-resident e-commerce operators, irrespective of their country or residence,” the ministry said.

The purpose of EL is to ensure fair competition, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through digital operations, it added.