Based on complaints from companies like Alphabet’s Google and Facebook, the United States had initiated an investigation into India’s Equalisation Levy (or Digital Service Tax). On 6 January 2021, the office of the United States Trade Representative (USTR) published the ‘Report on India’s Digital Service Tax’. The report criticised India’s decision to charge a 2% Equalisation Levy on ecommerce companies, who do not have a permanent establishment in the country, as ‘discriminatory’. The Indian government, however, has dismissed the claims of the USTR. So, what is the issue here?
Context
In the past, foreign companies engaged in online sale of goods and services to Indian customers did not pay taxes in the country. This was because they did not have a permanent establishment in India. Last year, the Indian government introduced a separate ‘Equalisation Levy’ of 2% on such companies.
Section 165A of Finance Act, 2020 headlined ‘Charge of equalisation levy on e-commerce supply of services’ states the following:
- On and from the 1st day of April 2020, there shall be charged an equalisation levy at the rate of two per cent, of the amount of consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated by it —
- to a person resident in India; or
- to a non-resident in the specified circumstances as referred to in sub-section (3); or
- to a person who buys such goods or services or both using internet protocol address located in India.
- The equalisation levy under sub-section (1) shall not be charged —
- where the e-commerce operator making or providing or facilitating e-commerce supply or services has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment;
- where the equalisation levy is leviable under section 165; or
- sales, turnover or gross receipts, as the case may be, of the e-commerce operator from the e-commerce supply or services made or provided or facilitated as referred to in sub-section (1) is less than two crore rupees during the previous year.
- For the purposes of this section, “specified circumstances” mean —
- sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and
- sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India
According to the Act, “ecommerce supply or services” means:
- online sale of goods owned by the e-commerce operator; or
- online provision of services provided by the e-commerce operator; or
- online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
- any combination of activities listed in clause (i), (ii) or clause (iii).
Concerns of the U.S.A:
The report of USTR stated that India’s Digital Service Tax (DST or Equalisation Levy) is “discriminatory, unreasonable, and burdens or restricts U.S. commerce”. It mentioned several reasons based on which the conclusions were made. These reasons based on the USTR investigations are listed below:
- India’s DST discriminates against U.S. digital service companies:
- The Act exempts Indian companies engaged in providing digital services from paying the levy but requires U.S. ‘non-resident’ companies to pay for the same services.
- The levy is only applicable for digital services. If the same service is provided non-digitally, the levy will not be charged.
- USTR identified 119 companies that may be liable to pay the DST in India, out of which, 72% (86 companies) are U.S. companies. Hence, India’s DST clearly discriminates against U.S. companies.
- India’s DST unreasonable contravenes international tax principles:
- USTR found that some of the language used in the Act was “unclear and ambiguous”, thereby failing to provide “tax certainty”.
- International tax principles mandate that if a company does not have a physical presence in the country, then it should not be subject to that country’s corporate tax regime. India’s DST does not stand the scrutiny in this case.
- The Act requires the DST to be charged on revenue of the companies, instead of income (or net profits). This is inconsistent with international tax principles.
- India’s DST burdens or restricts U.S. commerce:
- The total tax burden of the U.S. companies is estimated to be US$30 million per year, which will adversely impact the companies.
- The Act provides for taxing several digital services which are typically not taxed in other countries that have a DST regime. This will be a burden on many U.S. companies, which will be brought into the DST fold.
- The report found that the compliance cost may run into millions of dollars for each U.S. company affected by the DST.
- USTR noted that India’s DST will lead to double taxation for U.S. companies.
India’s response:
Ministry of Commerce and Industry, under the government of India, issued a response to the USTR report on 7 January 2021. Some of the points from the press statement are reproduced below:
- India based e-commerce operators are already subject to taxes in India for revenue generated from Indian market. However, in the absence of the EL [Equalisation Levy], non-resident e-commerce operators (not having any Permanent Establishment in India but significant economic presence) 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 EL levied at 2% is applicable on non-¬resident e-commerce operator, not having a permanent establishment in India. The threshold for this levy is Rs. 2 crores, which is very moderate and applies equally to all e-commerce operators across the globe having business in India. 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 of residence.
- There is no retrospective element as the levy was enacted before the 1st day of April, 2020 which is the effective date of the levy. It does not have extra territorial application as it applies only on the revenue generated from India. In addition, EL was one of the methods suggested by 2015 OECD/G20 Report on Action 1 of BEPS Project which was aimed at tackling the taxation challenges arising out of digitization of the economy.
- 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.
After the Union Budget was presented on Monday, India’s Commerce Secretary Anup Wadhawan defended the DST during a press briefing in New Delhi. The budget had provided further clarifications on the applicability of the equalisation levy.