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Digital tax in India

Topics Covered: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Digital tax in India:

Context:

The United States recently announced 25% tariffs on over $2 billion worth of imports from six nations over their digital services taxes, but immediately suspended the duties to allow time for international tax negotiations to continue.

  • The US. Trade Representative’s office had approved the threatened tariffs on goods from Britain, Italy, Spain, Turkey, India and Austria after a “Section 301” investigation concluded that their digital taxes discriminated against U.S. companies.
  • The potential tariffs aim to equal the amount of digital taxes that would be collected from U.S. firms.

About the Digital Tax:

India was the one of the first countries to introduce a 6 per cent equalisation levy in 2016, but the levy was restricted to online advertisement services.

However, India introduced the digital tax in April 2020 for foreign companies selling goods and services online to customers in India and showing annual revenues more than INR 20 million.

Applicability:

India has expanded the scope of the equalisation levy over the last few years, to tax non-resident digital entities.

  • While the levy applied only to digital advertising services till 2019-20 at the rate of 6 percent, the government in April last year widened the scope to impose a 2 per cent tax on non-resident e-commerce players with a turnover of Rs 2 crore.
  • The scope was further widened in the Finance Act 2021-22 to cover e-commerce supply or service when any activity takes place online.
  • Since May 2021, this also includes any entity that systematically and continuously does business with more than 3 lakh users in India.

When will the tax not apply?

Offshore e-commerce firms that sell through an Indian arm will not have to pay.

  • This means if the goods and services sold on a foreign e-commerce platform are owned or provided by an Indian resident or Indian permanent establishment, they will not be subject to the two percent equalization levy.

Why was it imposed?

The equalisation levy was imposed “to give level playing field between Indian businesses who pay tax in India and foreign e-commerce companies who do business in India but do not pay any income tax here.

Which other countries impose such a levy on digital sellers?

  1. France imposes a three percent digital services tax.
  2. In the ASEAN region, Singapore, Indonesia, and Malaysia impose a digital service tax with Thailand announcing forthcoming plans to tax its foreign digital service providers.
  3. Negotiations are underway at the Organisation for Economic Cooperation and Development (OECD) involving 140 countries to overhaul international tax rules given the fast growth of internet economies.

Why the United States Trade Representative (USTR) says that this tax is discriminatory?

  1. First, it states that the DST discriminates against US digital businesses because it specifically excludes from its ambit domestic (Indian) digital businesses.
  2. USTR also says the DST is discriminatory because it does not extend to identical services provided by non-digital service providers.

Why India says Digital services tax is not discriminatory? And why is it needed?

  • Business models employed by non-resident digital service providers obviate the need for a physical presence in India and profits earned here could easily escape the Indian income tax net. Hence, this kind of taxation is necessary.
  • Changing International Economic Order: Countries such as India which provide large markets for digital corporations seek a greater right to tax incomes.

Associated Concerns:

  1. Eventually the tax may become a burden for Digital Consumers.
  2. It could invite retaliatory tariffs (such as the latest one), as similar tariffs were imposed by the US on France.
  3. It would also result in double taxation.

 

Insta Curious:

  1. Think! For clarity on concepts: In B2B transactions where the Service Provider is outside India and the Service Receiver is inside India, who is the liable entity for tax? Read Here
  2. Have you heard of the Trade Watch Report by the World Bank? Read Here

 

InstaLinks:

Prelims Link:

  1. About the equalization levy.
  2. Applicability.
  3. Exceptions.
  4. Other countries with similar taxes.
  5. About OECD.

Mains Link:

Discuss the issues associated with the implementation of equalization levy.

Sources: the Hindu.