India rejects USTR finding on digital economy tax


India does not agree with the US Trade Representative’s (USTR) conclusion that the 2% tax on digital economy that New Delhi rolled out last April was “unreasonable or discriminatory,” commerce secretary Anup Wadhawan said here.

In a post-budget news briefing, Wadhawan said the USTR probe report on India’s e-commerce tax released in January which warned of withdrawing trade concessions or imposing duties on exports from India stemmed from the fact that US companies now dominate the tech industry.

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“As part of the process, we certainly convey our point (of view) and our position is certainly conveyed and we do not agree with that conclusion that you mentioned,” Wadhawan said referring to the USTR probe finding, in response to a question.

“If there is economic benefit from certain jurisdiction, then there has to be some taxation in that jurisdiction. That old argument of permanent establishment (PE) does not work,” Wadhawan said, explaining that a taxable physical business presence or PE was no longer relevant in an industry where digital services are remotely delivered.

“Organisation for Economic Cooperation and Development (OECD) is also moving in that direction. If you have economic presence and economic gain, you must have taxation in that jurisdiction,” Wadhawan said. Currently discussions are on at OECD for a more equitable global tax regime encompassing digital economy but the previous US administration suspended talks last year.

The USTR probe report that came in January described the 2% tax –called equalisation levy– discriminatory because it exempts Indian companies and targets non-Indian firms. The report had also said that of the 119 companies that it identified as likely liable under the digital services tax, 86 or 72% were US companies.

But New Delhi does not think it is discriminatory. “If you have billions of dollars of revenue in a jurisdiction, you have to pay taxes. France and other countries have also taken similar measures,” the official said. The US government’s protest stems from that country’s dominance in technology and digital services, whether Facebook, Google or Amazon, Wadhawn said. When such economic activity shifts to a more balanced mode, the same countries now opposing India’s digital economy tax would want to tax foreign entities doing business in their soil without a physical presence, he explained.

In spite of this, enthusiasm for talks for a new trade pact with the US has not dampened. “Bilateral discussions are always on. We have a thriving and robust partnership with the US and that will continue to grow. Whatever bilateral issue is there resolving them is an ongoing process,” the official said.

Taxing digital economy is one of the steps taken by the Modi administration to widen its tax base at a time tax revenue receipts were below targets. In its budget for FY22 presented on Monday, the government recast import duties to encourage domestic manufacturing industry and aid economic recovery. The commerce ministry will very soon announce finer details of an export incentive scheme which will be available to exporters with effect from January, the official said.

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