India said the DST does not have extraterritorial application as it only applies to income generated by the country.

The United States has determined that India’s digital services tax is discriminatory and has a negative impact on U.S. commerce and may result in action under the Commerce Act.

At the same time, the outgoing Trump administration has left the burden of any action against India under Section 301 of the U.S. Commerce Act to the new Biden administration.

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Publishing the results of the Digital Services Tax (DST) investigation in the Federal Register on Tuesday, U.S. Trade Representatives (USTR) said they had held consultations with the Indian government on the matter on November 5, 2020. .

Responding to the outgoing Trump administration’s decision, India said Thursday that the 2% equalization levy does not discriminate against U.S. businesses because it applies equally to all non-resident e-commerce operators, regardless of their country of residence.

In the report, the USTR describes the DST as “an outlier” that overwhelms American businesses with double taxation.

India had adopted the operational form of its digital services tax or DST on March 27, 2020.

DST imposes a 2% tax on revenues generated from a wide range of digital services offered in India, including digital platform services, digital content sales, digital sales of a company’s own products, data services, software as a service. and several other categories of digital services.

India’s DST only applies to “non-resident” companies. The tax applies from April 1, 2020, he said.

The USTR in the Federal Registry has stated that DST, by its structure and operation, discriminates against U.S. digital businesses, particularly because of the selection of services covered and its applicability only to non-resident businesses.

India’s response

In a statement in New Delhi on January 7, the Ministry of Trade and Industry said there was no retrospective element as the levy was passed before the first day of April 2020, which is the date of entry into force of the debit.

It also does not have extraterritorial application as it only applies to income generated by India, the ministry said.

The USTR alleged that the DST was unreasonable because it was inconsistent with the principles of international taxation, including because of its application to revenue rather than income, extraterritorial application and failure to ensure certainty fiscal.

“India’s DST weighs or restricts US trade,” the USTR said.

He noted that Sections 301 (b) and 304 (a) (1) (B) of the Commerce Act provide that if the United States Trade Representative determines that an act, policy or practice of a country foreigner is unreasonable or discriminatory and restricts United States trade, the United States trade representative will determine what action, if any, is required under Section 301 (b).

“These issues will be addressed in subsequent Section 301 proceedings,” the USTR said.

Report Details

In its report released by the USTR on January 6, it alleged that “non-resident” US providers of digital services are taxed, while Indian providers of the same digital services to the same customers are not.

“It is discrimination in its clearest form,” he said.

“Indeed, an Indian government official confirmed that the very ‘purpose’ of the DST is to discriminate against foreign non-resident companies, explaining that: ‘[a]All parts of the digital tax incident should be on the foreign actor, because if the impact is passed on to the Indian actor, it doesn’t really serve the purpose, ”he said.

The USTR, in its investigation report, determined that three aspects of the DST are inconsistent with the principles of international taxation: First responders found the text of the DST unclear and ambiguous.

“This creates uncertainty for businesses regarding key aspects of DST, including the scope of taxable services and the universe of businesses subject to tax. India has not issued any official guidelines to resolve these ambiguities. This is tantamount to not providing tax certainty, which violates a fundamental principle of international taxation, ”alleged the USTR.

“The DST taxes companies without a permanent establishment in India, contravening the international tax principle that companies should not be subject to the corporate tax regime of a country in the absence of a territorial link with that country,” said he declared.

Noting that the DST taxes companies’ income rather than their income, the USTR has said this is inconsistent with the international tax principle that income – not income – is the appropriate basis for corporate taxation.

Alleging that daylight saving time creates an additional tax burden on U.S. businesses, the USTR estimates that the overall tax bill for U.S. businesses could exceed $ 30 million per year.

Several aspects of the DST exacerbate this tax burden, including the extraterritorial application of the DST, its taxation of income rather than income, and its low domestic income threshold that allows India to tax US companies that do relatively little. business in India, she alleged.