Digital Services Tax: Not about India vs US
Recently the United States Trade Representative (USTR) published a report concluding that the 2 per cent digital services tax (DST) introduced by the Indian government vide the 2020 Finance Act discriminates against US businesses, contravenes settled principles of international tax law, and restricts US commerce. The report was published following an investigation conducted by USTR under section 301 of the US Trade Act, 1974, which authorises it to appropriately respond to a foreign country’s action that is discriminatory and negatively affects US commerce. India’s 2 per cent DST is levied on revenues generated from digital services offered in India, including digital platform services, digital content sales, and data-related services. Pertinently, India was one of the first countries in the world to introduce a 6 per cent equalisation levy in 2016, but the levy was restricted to online advertisement services (commonly known as “digital advertising taxes” or “DATs”). The 2020 DST, however, is broader in scope and extends to all kinds of digital transactions.
The DST is aimed at ensuring that non-resident, digital service providers pay their fair share of tax on revenues generated in the Indian digital market. Currently, Indian double taxation avoidance agreements (tax treaties) with foreign jurisdictions do not permit the source-based taxation of business profits of non-resident companies in India in the absence of what is called a “permanent establishment” (PE).
The US government must remind itself that the DST has been adopted as an interim measure to cope with the challenges posed by the digital economy, while a multilateral solution at the level of the OECD is underway. A prudent solution, therefore, is not for the US government to flex its muscles but to participate in these global talks and protect the interests of US commerce by entering to dialogues with hundreds of countries who are trying hard to reach a global consensus on the issue of digital economy taxation.
