Is US trade body's probe undermining India's right to tax digital transactions?

US Trade Representative (USTR) has found India's 2% equalisation levy on revenue generated from a broad range of digital services offered in India unreasonably contravening international tax principles. But the Indian government's stance on the issue is that it is the sovereign right of the parliament to tax certain transactions if origin of those transactions are from within India.

In a recent interaction, revenue secretary Ajay Bhushan Pandey had told BusinessToday.In that India is not taxing any transaction outside India, but if any transaction has happened within India, by whatever name you may call those transactions, they can be taxed by Indian parliament.

"This is a matter of general principle and it is followed by every country. Every country has a sovereign right to tax its own people and also the transaction that is happening within its boundaries," reiterated the revenue secretary.  The government is yet to issue a formal response to the latest investigation report by the USTR.

The USTR finds India's equalisation levy to be discriminatory in nature, especially against the US digital companies, contravening international tax principles and restrictive to US commerce.

The investigation by the USTR found that the India's digital services tax targets digital services, but not similar services provided non-digitally. "Because US companies are global leaders in the digital services sector, US companies face an inordinate share of tax burden. Indeed, of the 119 companies that USTR has identified as likely liable under the Digital Services Tax, 86 (72%) are US companies," says the investigation report.

It also points out that India has breached the tax principles on three counts. First, it creates uncertainty for companies regarding key aspects of the DST, including the scope of taxable services and the universe of firms liable to pay the tax.  "India has published no official guidance to resolve these ambiguities. This amounts to a failure to provide tax certainty, which contravenes a core principle of international taxation," says the report.  

It further says that the new levy taxes companies with no permanent establishment in India, contravening the international tax principle that companies should not be subject to a country's corporate tax regime absent a territorial connection to that country.

Amit Maheshwari, Tax Partner, AKM Global, a consulting firm says, "The US had earlier also showed strong opposition to the OECD digital tax proposal and French Digital services tax. Therefore, such reaction towards India's DST was expected. US has alleged that well established International tax principles such as certainty, reasonableness, extra territorial reach, application of tax on income had been seemingly contravened. India has rushed this tax without much discussion and several issues in terms of coverage and compliance remain open. Inspite of the opposition from the US, many European Union countries and others have already implemented their own version of the DST in line with BEPS Action Plan 1."

He further added that instead of opposing these policies unilaterally, the US should make an effort to arrive at an inclusive framework in the interest of fair and equitable distribution of earnings to all the market trading partners and jurisdictions.

Besides, it also points out the fact that equalisation levy taxes companies' revenue rather than their income. This, the investigation found, to be inconsistent with the international tax principle that income-not revenue-is the appropriate basis for corporate taxation.

The Indian government had earlier responded to the USTR probe against equalisation levy on e-commerce supply and services by saying that the tax was neither discriminatory nor extra-territorial. The Indian government has also said that levy is prospective in nature and not retrospective.

The government in its response has expressed regret at the initiation of probe. In its response, the government had said that India reassures the United States that the equalisation levy is entirely consistent with India's commitments under the WTO and international taxation agreements. It said that far from targeting any US company or companies, the purpose of the equalisation levy is to ensure greater competitiveness, fairness, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations.

Also read: US says India's digital tax discriminates against American companies

Also read: USTR condemns India, Italy, Turkey on digital taxes; holds off on tariffs