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Digital Services Tax

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February 12, 2021

Why in news?

United States Trade Representative (USTR) reported that India’s DST is discriminatory & inconsistent with international tax principles.

What is Digital service tax (DST)?

  • Digital companies are not adequately taxed because they don’t have a physical location in the markets where they operate.
  • DST aims to ensure that non-resident, digital service providers pay their fair share of tax on revenues generated in the Indian digital market.

How does India’s DST evolved?

  • In 2016, Akhilesh Ranjan Committee suggested to create a level-playing field between online businesses and brick-and-mortar businesses.
  • Since digital businesses don’t have physical presence but enjoy a sustainable economic presence they need to be taxed.
  • In 2016, India became the first country to implement the equalisation levy, on advertising services at 6%.
  • In 2018, India introduced the term significant economic presence in Income Tax Act.
  •  According to which, if a company had users in India, it sort of defined its economic connection with India and therefore gives India the right to tax.
  • In 2020, the new equalisation levy expanded its scope even to e-commerce.

How India’s DST different from U.K.?

  • India’s equalisation levy was on company’s revenue rather than on profits but U.K. allows companies not to pay any tax if their net operating margin is negative.
  • If an Indian user located in the U.K., receiving services from a U.S. company, U.K. DST contemplates that only 50% of the revenues from such a transaction would be chargeable to U.K.
  • In U.K., DST excludes companies that sell their own inventories but India’s equalisation levy covers everything under the sun.
  • This makes U.K. different from India on its implementation but U.S. also looks at the U.K. taxes in some way as discriminatory.

Is India’s DST discriminatory?

  • USTR reports find India’s DST is discriminatory because tax incident by design is on non-resident company’s levy.
  • But the market itself is dominated by U.S. firms hence it finds discriminatory but reality is not so.
  • Moreover the threshold that India has laid down for the equalisation levy is actually much below what the EU envisages.
  • Moreover the levy aims to create a level-playing field with ordinary businesses have a physical presence & pay regular taxes.
  • Now international communities are moving towards a scenario where such transactions need to be taxed.
  • Hence to say that levy violates international tax principles is not valid.

What will happen now?

  • Since Section 301 of the investigations are unilateral in nature, US might wish collaborate with India.
  • It will find an amicable solution rather than imposing strict trade tariffs which happened between France and the U.S earlier.

What is the way forward?

  • One, India is committed to the OECD process and to influence it, there are ways to tweak the design as it will be put out only in June 2021.
  • The design can be worked out by taking into consideration the interests of the developing countries.
  • Secondly, United Nations is also taking some sort of leadership on this to design its own proposal which is an automated DST.
  • It means that within the existing treaty framework a provision of withholding the payments that are made from markets to jurisdictions is proposed.
  • Thirdly, DST will be first applied and then countries will be allowed to bilaterally negotiate with their respective partner countries for the process of crediting this tax.

 

Source: The Hindu

 

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