The tussle of Digital Services Tax between India and US

Synopsis:

The US has rolled back its increased tariff on products of 6 countries including India. It now wants to negotiate, over the imposition of a digital service tax by the 6 nations. It is even willing to engage in a future trade war. 

Background:
  • The six countries of Austria, India, Italy, Spain, Turkey, and the U.K. had imposed a Digital Services Tax (DST) on non-resident e-commerce operators
    • In India, a 2% digital service tax was levied on trade and services offered by non-resident e-commerce operators having a turnover of over 2 crores.
What is the Digital Services Tax (DST) imposed by India?

The DST imposes a 2% tax on revenue (revenue, not income. Both are different) generated from a broad range of digital services offered in India, including

  • Digital platform services
  • Digital content sales
  • Digital sales of a company’s own goods
  • Data-related services
  • Software-as-a-service, and several other categories of digital services

India’s DST only applies to “non-resident” companies. The tax applies as of April 1, 2020, with no retrospective element (retrospective taxation means tax has to be paid on income earned in the past).

Based on this, The Office of the United States Trade Representative (USTR) began an investigation (in June 2020) to find out the discriminatory nature of these digital taxes imposed by six countries.

What did the USTR investigation find out?

How did US react to the findings of the investigations?

  • The US  announced 25% tariffs on over $2 billion worth of imports from the six countries including India.
  • However, it immediately suspended the duties to allow time for international tax negotiations and due to the poor economic condition of countries during the pandemic era.
What does this retaliatory move by US indicate?
  • First, the move shows that a hefty tax can be imposed on other countries under Section 301 of the U.S. Trade Act of 1974.
    • The section authorizes the President to take all appropriate action, including tariff-based and non-tariff-based retaliation against foreign countries.
    • The objective is to obtain the removal of any act, policy, or practice that violates an international trade agreement or is unjustified, unreasonable, or restricts U.S. commerce. 
  • Second, the move shows the U.S.’s may be willing to start a trade war for protecting the interests of its tech giants against the imposition of Digital Taxes.
  • Third, similar to the Trump administration, the new Biden administration also views digital taxes to be discriminatory in nature. It also wants dominance of the global playing field by the American tech firms without fear of being slapped with tax liabilities.

Way Ahead:

  • The countries should engage and negotiate peacefully on the concerning provisions. Imposition of unnecessary barriers by either side would only generate adverse results.
    • For instance, U.S tariffs would impact $118 million worth of Indian exports to the country.
  • Co-operation is desired as the world can hardly afford another tariff war in the post-COVID era. 

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