Snapshot of “Section 301 Investigation Report on India’s Digital Services Tax”.

In June, 2020, the US Trade representative[1] initiated an investigation of India’s 2020 Equalisation levy (EL 2020) under the Section 301 of the Trade Act of 1974 to determine whether India’s EL 2020 is unreasonable / discriminatory and burdens / restricts U.S. commerce. The report was made public on 06 January, 2021. In this light the author intends to enlighten the reader (i) what has been concluded in the report? (ii) what does it mean for India; and (iii) what is the history of investigations u/s 301 of USTR act.

What has been concluded in the report?

1. From 01 April, 2020 India has imposed 2% Equalisation Levy on revenue generated from use of digital platforms for sale of goods / provision of services by non-resident person in India with few exceptions. The incidence of the 2% EL is on the non-resident person.

2. The report claims that India’s EL 2020 is unreasonable / discriminates against U.S. companies and burdens / restricts US commerce due to following.

1. The law explicitly exempts Indian companies, while targeting non-Indian firms;

2. “non-resident” providers of digital services are taxed, while Indian providers of the same digital services to the same customers are not;

3. one Indian government official confirmed that the very “purpose” of the EL 2020 is to discriminate against non-resident foreign companies, explaining that: “[a]ll parts of the digital taxation incident should be on the foreign player, because if the incidence is passed on to the Indian player, then it doesn’t really serve the purpose.”[2];

4. The EL 2020 targets digital services, but not similar services provided nondigitally;

5. Out of the 119 companies that USTR has identified as likely liable under the EL 2020, 86 (72%) are U.S. companies;

6. USTR estimates that the aggregate tax bill for U.S. companies could exceed US$30 million per year;

7. The unusually expansive scope of taxable digital services under the EL 2020 makes the tax particularly burdensome for U.S. companies;

8. The EL 2020 forces U.S. companies to undertake costly measures to comply with the tax payment and reporting requirements. This includes the reengineering of existing systems to collect and organize new and different types of information. USTR’s analysis indicates that compliance costs could run into the millions of dollars for each affected company.

3. The report claims that India’s EL 2020 unreasonably contravenes international tax principles due to following.

1. EL 2020’s language is unclear and ambiguous and hence uncertain in its application;

2. India has not published any official guidance to resolve this ambiguity;

3. EL 2020 taxes companies with no permanent establishment in India. This contravenes the international tax principle that companies should not be subject to a country’s corporate tax regime absent a territorial connection to that country;

4. EL 2020 taxes companies’ revenue rather than income.

What does it mean for India

USA may (1) impose duties or other import restrictions, (2) withdraw or suspend trade agreement concessions, or (3) enter into a binding agreement with the foreign government (India govt.) to either eliminate the EL 2020 or compensate the United States with satisfactory trade benefits.

what is the history of investigations u/s 301 of USTR act.

Now that we have understood the USA’s perspective and its impact of this investigation. Let’s identify whether there have been such investigations in the past on other countries and action taken if any?

There have been 130 cases under Section 301 (as of Jan 2021) since the law’s enactment in 1974, of which 35 have been initiated since the WTO’s establishment in 1995. These cases have been against the EU, Canada, Japan, South Korea etc. Between 2007 and 2017 only couple of times investigation under section 301 has taken place. However, recently, there have been flurry of investigations against countries such as China (in 2017), the EU (2019), France (2019), Vietnam (2020) etc. Out of the above, actions are also taken against China, the EU and France by imposing retaliatory tariffs on imports from USA.

Further, the investigation for Digital Services Tax (i.e. EL) has also been initiated against many countries such as Austria, Brazil, the EU, India, Italy, Indonesia and Turkey. However, as of today it is not clear whether any action is taken against any of the countries or not.

[1] The Office of the United States Trade Representative (USTR) is the United States government agency responsible for developing and recommending United States trade policy to the president of the United States, conducting trade negotiations at bilateral and multilateral levels, and coordinating trade policy within the government through the interagency Trade Policy Staff Committee (TPSC) and Trade Policy Review Group (TPRG). https://en.wikipedia.org/wiki/Office_of_the_United_States_Trade_Representative

[2] International Tax Review, “Discussion: Kamlesh Varshney talks about India’s tax policy agenda,” March 30, 2020, available at: https://www.internationaltaxreview.com/article/b1kxs1b3pvv2x1/discussion-kamlesh-varshney-talksabout- indias-tax-policy-agenda.

Author Bio

Qualification: CA in Job / Business
Company: N/A
Location: Mumbai, Maharashtra, IN
Member Since: 01 Aug 2017 | Total Posts: 1

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