USTR slams India’s Equalisation levy

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: 

1. Firstly, it is discriminatory as the law explicitly exempts Indian companies while targeting non-Indian firms. 
2. 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. 
3. 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. 
4. 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? 

1. 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. 
2. The levy does not have extraterritorial application as it applies only on the income generated from India. 
3. 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. 
4. 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. 
5. 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.