Washington said that it will probe the digital services taxes (DST) imposed by 10 countries including India under Section 301 of its 1974 Trade Act on Tuesday, which could lead to punitive action.
How Would This Affect?
Further, the development comes after a telephonic conversation between US President Donald Trump and Prime Minister Narendra Modi.
US trade representative (USTR) Robert Lighthizer said, “President Trump is concerned that many of our trading partners are adopting tax schemes designed to unfairly target our companies,” in a statement.
Moving ahead, he added that the US is prepared to take all “appropriate action to defend our businesses and workers against any such discrimination”.
USTR said, “In March 2020, India adopted a 2% DST. The tax applies only to non-resident companies, and covers online sales of goods and services to, or aimed at, persons in India. The tax applies only to companies with annual revenues in excess of approximately Rs 20 million (about $267,000). The tax went into effect on April 1, 2020,” in a statement.
Further, the US said it has requested consultations with the respective governments.
Another official said, “As per the guidelines, we will have to submit a proper response…We will engage with the US,”.
What About India?
As per the reports, New Delhi, downplayed the move, saying the action is against 10 countries and not specific to India.
A commerce department official said, “This is in the initial stage and we don’t think the move is punitive or anti-trade,”.
“India has not been singled out. We will defend ourselves and hope the issue will be dropped subsequently,” the official added.
Apart from them, Austria, Brazil, the Czech Republic, the European Union, Indonesia, Italy, Spain, Turkey, and the UK are the other countries that the US will probe.
So far, India levies a 6% equalization levy or the so-called ‘Google tax’ on foreign online advertising platforms to tax companies such as Google, Facebook and Netflix on their online advertising.
It expanded its scope to all overseas e-commerce transactions originating from India this year, but at a reduced rate of 2%.
Additionally, New Delhi has also imposed tax deducted at source on e-commerce transactions, to be effective from October 1, in addition to tax collected at source under the GST.
How Did This Affect?
Prior to this, there have been reports in April that the US had flagged India’s 6% equalization levy on foreign online advertising platforms, saying it may impede its overseas trade and increase the risk of retaliation from countries where Indian companies are doing business.
Also, a number of US MNCs have also represented to the Indian government about the 2% levy introduced in the budget in February as also the TDS.
Moreover, section 301 allows the USTR to investigate and respond to a foreign country’s action, which may be unfair or discriminatory and negatively affect American trade, and could lead to punitive action.
Although experts said that though India has flexibilities under global trade norms to levy digital taxes, it should be cautious of Washington using it in the bilateral trade talks.
So far, the two sides have been negotiating a trade deal for more than a year with ministers and officials of both countries discussing the issues at various domestic and global fora.
one expert said, “Section 301 is against the World Trade Organization’s rules. If the US imposes any punitive tariffs, we can retaliate,” on trade issues.
Before this, the EU had challenged the US’ Section 301 law in 1988, arguing that certain sections violated US obligations in the WTO.
According to another expert, India has flexibilities under the General Agreement on Trade in Services to impose the equalization levy.
He further added, “Our GATS commitments are negligible and we can levy such taxes,”.
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