India’s equalisation levy “does not discriminate against non-resident e-commerce operators” and its imposition “is entirely consistent with India’s commitments under the WTO and international taxation agreements”, the government of India wrote in its response to the US Trade Representative’s investigation into digital services taxes under Section 301 of the US Trade Act. Submitted by Manoj Kumar Mohapatra, the Minister of Commerce in the Indian Embassy in the US, the submission took note of the investigation “with regret”. However, most industry bodies called the levy discriminatory. Going against the grain, IBM said that this Section 201 investigation was not the best way to resolve the issue and instead said that the US should participate in the OECD discussions.
On June 2, the United States Trade Representative Robert Lighthizer had started an investigation into digital services taxes that have been adopted or are under consideration by a number of US’ trading partners. This investigation is being conducted under Section 301 of the 1974 Trade Act which gives the USTR authority to investigate and respond to another country’s actions that may be unfair or discriminatory and negatively affect American commerce. Countries under investigation include India, Austria, Brazil, the Czech Republic, the EU, Indonesia, Italy, Spain, Turkey and the UK. India brought its 2% equalisation levy into effect on April 1, 2020.
The USTR had invited comments on the issues covered by the investigation until July 15. The USTR has also requested consultations with the governments of these countries, something which the government of India has acceded to.
‘Equalisation levy levels the playing field,’ says Indian govt
In its submission, the Indian government said that the aim of the levy is to ensure a level-playing field wherein “neutral and equitable” taxes are imposed on e-commerce operators that have a physical presence in India and those that are not resident in India. It also said that it does not discriminate against companies based in the US as it equally applies to all non-resident e-commerce operators without permanent establishment in India. The submission also cited an American case — South Dakota vs Wayfair Inc. — wherein the Supreme Court of the US held that physical presence is not required to levy sales tax by a state as long as there are buyers in the state.
This levy is a safeguard against Base Erosion and Profit Shifting (BEPS) since the multilateral consultations under the aegis of the G20 OECD have not arrived at a consensus, the submission said. The Indian government had imposed a 6% equalisation levy on digital advertising services offered by non-resident providers in 2016. India has, for quite some time now, seeking to tax digital companies on the basis of their economic presence. To that end, Finance Minister Nirmala Sitharaman had called for adoption of the “significant economic presence” concept to tax global digital companies at the G20 Finance Ministers and Central Bank Governors’ Meeting in June 2019.
The OECD had initially set July 2020 as the deadline for ironing out an agreement to overhaul its cross-border tax rules. However, because of the pandemic, this deadline was moved to October 2020.
Industry associations, lobbies call equalisation levy ‘discriminatory’ in submissions
United Stated Council for International Business, a New York-based business advocacy group, argued that India’s equalisation levy is discriminatory against non-resident businesses, causes tax to exceed profit and at times revenue from the transaction, and did not provide enough time for compliance. Moreover, coupled with GST, imported goods and services are subject to double taxation. It also said that the levy is a substitute for income tax and thus in contravention of the Double Taxation Avoidance Agreement between India and the US. “A probable outcome of this DST would be to force companies to localize operations in India,” the submission read.
Internet Association, a Washington, DC-based lobbying group that was founded by Google, Amazon, eBay, Facebook, etc., called India’s equalisation levy “unreasonable” and discriminatory against American companies. Business Standard first reported this.
The US Chamber of Commerce cited the national treatment principle under the WTO’s General Agreement on Trade in Services (GATS) to argue that India’s equalisation levy is discriminatory in nature. As per the national treatment principle, WTO members must accord “to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to its own like services and service suppliers” (GATS Article XVII).
The Silicon Valley Tax Directors Group, which includes tax directors from major tech companies including Amazon, Adobe, Dropbox, Facebook, Microsoft, etc., on the basis of reports from CNBC TV-18 and Bloomberg Quint argued that the equalisation levy intends to target primarily American companies. They also argued that unlike the French digital services tax that may include certain French companies, India’s equalisation levy is imposed only on non-resident companies. They criticised the lack of time given to companies to comply with the tax since it came into effect just four days after enactment. Moreover, the new equalisation levy does not “relieve double taxation on transactions that may be subject to other DSTs”.
The US-India Strategic Partnership Forum (USISPF) argued that the imposition of the equalisation levy contradicts efforts to create a unified digital tax framework via the G20/OECD BEPS project deliberations. It further said that it is discriminatory against foreign companies, “and, in practice, against US companies”, did not provide enough notice before implementation, was impose in the midst of a global pandemic, and its provisions are “unclear, overly broad, and inconsistent with international norms”.
Engine Advocacy, a California-based non-profit organisation that focusses on technology start-ups, argued that since the equalisation levy has a much lower revenue threshold — around $267,000 — many small- and mid-sized start-ups could be exposed to liability. For this reason, such companies would have to “undertake costly tax planning to determine if they in fact owe tax, what their tax burden is, how to remit the tax”. It also called the levy discriminatory since it only applies to non-resident companies.
IBM wants the US to engage through the OECD
IBM asked Lighthizer to engage with the issue only through multilateral, international bodies such as the OECD or the WTO. Since countries that are considering digital services taxes are already engaged at the OECD, Chris Padilla, IBM vice president of government and regulatory affairs, called US’ decision to suspend participation in the OECD discussions on this issue “disturbing”. He expressed “significant reservations” about an investigation under Section 301 as “the use of unilateral, retaliatory measures would carry serious risk for the broader U.S. economy” via counter-retaliatory measures.