The United States Trade Representative (USTR) has called India’s equalization tax (also known as the Google tax) on e-commerce businesses “discriminatory”. India, however, said it was non-discriminatory and would take appropriate action on the matter keeping in mind the overall interests of the nation.
“India’s DST (Digital Services Tax), known as Equalization Tax in India, is discriminatory, unreasonable, and burdens or restricts U.S. commerce and, therefore, actionable under Article 301 (of the Commerce Act, 1974),” the USTR said in its investigation report. . The investigation, opened by the USTR on June 2 last year, said the tax explicitly exempts Indian companies and that only “non-residents” have to pay the tax.
“The DST creates an additional tax burden for American businesses. The USTR estimates that the overall tax bill for U.S. businesses could exceed $30 million annually,” the report said.
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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 an equalization levy, non-resident e-commerce operators (having no permanent establishment in India) are not liable to pay any taxes in respect of the consideration received in connection with the supply or e-commerce services carried out in the Indian market.
“The equalization levy is an acknowledgment of the principle that in a digital world, a seller can engage in commercial transactions without any physical presence, and governments have the legitimate right to tax those transactions,” an official said. case follow-up.
Activity area. India will consider the decision notified by the United States in this regard and take appropriate action in consideration of the general interest of the nation, the official said, adding, “The levy does not discriminate against any American company as it is also applies to all resident non-e-commerce operators, regardless of their country of residence.
Introduced in 2016, the equalization levy initially applied to payments for digital advertising services received by non-resident companies without a permanent establishment here, if these exceeded ₹1 lakh per annum. The tax rate was 6%. Businesses using these services are required to withhold the amount of tax.
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In the 2020-2021 Union Budget, the scope of the tax has been expanded to include e-commerce businesses. The applicable tax rate is 2% (plus a surcharge) on the amount of consideration received/receivable by an e-commerce operator. This came into force on April 1.
Here, an e-commerce operator refers to a non-resident who owns, operates or manages a digital or electronic facility or platform for the online sale of goods or the provision of online services or both. The law states that this tax will not apply to any e-commerce operator engaged in/providing/facilitating e-commerce supplies or services that has a permanent establishment in India and such e-commerce supplies or services are effectively related to this permanent establishment. Also, an operator whose annual turnover is up to ₹2 crore is exempt from the tax.
The report says the 2016 digital advertising tax is not the focus of this investigation. This investigation instead focuses on an extension of this 2016 tax that the Indian government passed in 2020, which has been called DST, and which applies to e-commerce businesses. The DST first appeared publicly on March 23, 2020 in the amendments to the Indian Finance Act 2020. Companies did not receive any notice of this legislation before that date.
According to the report, just four days later – with no opportunity for public comment – the DST became law. The tax then went into effect five days later. To date, the Indian government has not issued any implementing regulations clarifying the basic aspects of the DST, such as the scope of services covered, the companies covered, etc. India has, however, amended the existing rules relating to DST payment mechanisms. in October 2020, the report mentions.
Actions permitted under this section include suspending, withdrawing, or preventing the application of the benefits of trade agreement concessions; impose duties, fees or other import restrictions on goods or services from the foreign country; enter into binding agreements that commit the foreign country to eliminating or phasing out the offending behavior or providing compensatory trade benefits; or restricting or denying the issuance of service industry licenses, which are federal licenses or other authorizations required to provide services in certain industries in the United States.