(ATF) India has been quick in dismissing the US Trade Representative's (USTR) allegations that its digital services taxes discriminate against US companies, arguing that the levy creates a level playing field and ensures fair competition for all non-resident e-commerce operators.
In a statement, India’s commerce department also said that the government will examine the concerns of the USTR and take appropriate action.
The USTR on Wednesday said India’s 2% digital services tax discriminates against American digital services companies such as Netflix and Amazon, while arguing that it was also against the principles of international taxation.
The allegations were made in a release by the USTR following and investigation of India’s 2020 Equalisation Levy (the DST) under Section 301.
UNFAIR AND INCONSISTENT
“India’s DST is discriminatory on its face,” the report said adding: “The law explicitly exempts Indian companies, while targeting non-Indian firms. The result is that US “non-resident” providers of digital services are taxed, while Indian providers of the same digital services to the same customers are not. This is discrimination in its clearest form.”
The USTR also claimed that an Indian government official had confirmed that the very “purpose” of the DST is to discriminate against non-resident foreign companies, explaining that DST should be levied on foreign players only because if the incidence is passed on to the Indian players, it doesn’t really serve the purpose.
According to the USTR, at least three aspects of the DST are inconsistent with principles of international taxation.
For one, the text of the DST is unclear and ambiguous, that creates uncertainty for companies regarding the scope of taxable services and the universe of firms liable to pay the tax.
And since India has not published official guidance to resolve these ambiguities, “this amounts to a failure to provide tax certainty, which contravenes a core principle of international taxation,” the report said.
The DST also taxes companies’ revenue rather than their income, which too is inconsistent with the international tax principle that income—not revenue—is the appropriate basis for corporate taxation.
Finally, the DST targets digital services, but not similar services provided nondigitally. “Because US companies are global leaders in the digital services sector, US companies face an inordinate share of tax burden,” the report said.
USTR reckoned that of the 119 companies identified by it, 86 (72%) are American. From Facebook and Google to Netflix and Airbnb, several companies face the levy. USTR estimated that the aggregate tax bill for American companies could top $30 million annually.
Resultantly, American companies are subjected to double taxation and forces them to undertake costly measures to comply the payment and reporting requirements, it said.
The USTR report also alleged said that not only was the text unclear but the authorities have not bothered to resolve the ambiguities.
But India dismissed the allegations on Thursday and said the equalisation levy creates a level playing field.
“The purpose of the equalisation levy 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 their digital operations. It 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,” the Commerce and Industry Ministry said in a statement.
E-commerce operators are obligated to pay the tax on the finish of every quarter
The levy was applied only prospectively, the ministry added, and has no extra-territorial application, since it is based on sales occurring in the territory of India through digital means.
The ministry argued that the levy was one of the methods suggested by the OECD's G20 Report on Action 1 of BEPS Project (2015), which was aimed at tackling the taxation challenges arising out of digitisation of the economy.
The 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, added the ministry’s statement.
The department added that the government will examine the determination and take appropriate action.
RETALIATION IN THE OFFING?
While the USTR did not immediately specify actions to counter such taxes, according to experts, given that the report said, "(The USTR) will continue to evaluate all available options," the finding paves the way for potential retaliatory tariffs by the US.
The fear is, the probes were among several still open USTR Section 301 investigations and could lead to tariffs before President Donald Trump leaves office or early in the administration of President-elect Joe Biden.
Among these is a more advanced probe into France's digital services tax.
The USTR has also concluded the digital taxes imposed by France, Italy and Turkey too discriminate against big US tech firms, such as Google, Facebook, Apple and Amazon.com
USTR had set a January 6 deadline for implementing 25% tariffs on French cosmetics, handbags and other imports valued at around $1.3 billion annually in retaliation against the French digital taxes.
But it was unclear late on Wednesday whether collections of those duties would begin as scheduled.
The USTR and Customs and Border Protection, the agency responsible for tariff collections, did not respond to multiple requests for comment.
(With reporting by Reuters)