India’s Digital Services Tax: Discriminatory?

12 Feb India’s Digital Services Tax: Discriminatory?

Context:

• Recently, a United States Trade Representative (USTR) investigation found India’s Digital Services Tax (DST) to be biased.
• It mentioned that the tax is not consistent with prevailing principles of international taxation. It burdens as well as restricts U.S. commerce.
• India has rebuffed these charges.

Digital Services Tax:

• A DST is a tax on selected gross revenue streams of extensive digital companies. Each country’s ex[ected or implemented DST varies slightly.
• All DSTs have domestic and global revenue brinks, below which companies are not subject to the tax.

Issue:

• India inducted a six percent equalization duty in 2016. From then to taxing a wider basket of e-services in 2020.
• The fact that a 2% tax, India has charged since 2020 on revenues from digital services, applicable only to non-resident companies.
• The primary matter was that companies don’t have a physical presence in the markets where they conduct their business.
• India, in 2018, had introduced a test for compelling economic presence in the Income Tax Act, according to which, if a company had users in India, it sort of interpreted its economic connection with India, and hence gave India the right to tax.
• One of the focal criticisms against India’s equalization levy is that it is a tax on revenue as compared to a tax on profits. The U.K. allows companies to not pay any tax if their net margin is in the loss.

Way Ahead:

• As the US claims the law is arbitrary but there are several areas that are not in conformity with what could be a valid reason to call a particular act discriminatory.
• This confrontation could affect the bilateral relationship between the two countries as well as the reputation that it might send globally could be devastating to the Indian economy.
• The act, at best, could be termed as unreasonable but not discriminatory.

Ajit Satapathy