News: US Trade Representative (USTR) has released the findings of the Section 301 report.
Source: The Hindu
The report has said that India’s 2% equalisation levy is unreasonable or discriminatory potentially attracting withdrawal of US trade concessions or duties on Indian exports.
What is Equalisation Levy?
- When was 2% Equalisation Levy introduced? In the Finance Bill 2020-21 a 2% digital service tax (DST) was imposed on non-resident e-commerce operator in India.
- Eligibility: Companies with a turnover of over Rs. 2 crore, will pay this levy on the consideration received for online sales of goods and services.
- Purpose: The purpose of the 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
Why USTR is concerned?
- USTR is mainly concerned as 72% companies that will face the levy are American.
- Aggregate tax bill for US companies will exceed US $ 30 Million.
What does the Special 301 Report say on Equalization levy?
The USTR report has said that the Equalisation Levy is a violation of international tax principles:
- Firstly, it is discriminatory as the law explicitly exempts Indian companies while targeting non-Indian firms.
- Secondly, levy is contravening the international tax principle that companies absent a territorial connection to a country should not be subject to that country’s corporate tax regime.
- The third issue is of taxing revenue instead of income. This is inconsistent with the international tax principle that income—not revenue—is the appropriate basis for corporate taxation.
- Fourth, levy is discriminating against US companies. As shown above, majority of the affected companies will be American.
What are the justifications by the Indian Government?
- India has said that levy does not discriminate against US companies as it applies equally to all non-resident e-commerce operators irrespective of their country of residence.
- The levy does not have extraterritorial application as it applies only on the income generated from India.
- Government is in its rights to tax digital transactions as the levy is recognition of the principle that in a digital world, a seller can engage in business transactions without any physical presence.
- In addition, Equalisation levy was one of the methods suggested by the 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.
- Equalisation levy is a way to tax foreign digital companies and seen as a temporary alternative to the GAFA (Google, Apple, Facebook and Amazon) tax until such measure is well defined in India.