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“Equalization levy ensures fair competition”: Indian govt defends against US Trade Representative’s critical report

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The purpose of equalization levy (EL) is to ensure fair competition, reasonableness and exercise the ability to tax businesses that have a close nexus with the Indian market through their digital operations, said the Indian government, in response to the United States Trade Representative’s report. In a statement released on Thursday, the Ministry of Commerce said that absence of EL allows non-resident e-commerce operators to avoid taxes on services made available in the Indian market.

Earlier this week, US Trade Representative Robert Lighthizer released a 41-page report criticising India’s decision to impose an EL of 2% on digital services offered by foreign firms. It had said that the levy is “discriminatory on its face” as it target non-Indian firms, while exempting Indian companies. The result is that U.S. “non-resident” providers of digital services are taxed, while Indian providers of the same digital services to the same customers are not. This is discrimination in its clearest form,” the USTR’s report had said. The report had also questioned similar digital services tax regimes in Turkey, France, Italy, Spain, UK and Austria.

The EL was introduced by India in 2020, along with other countries’ introducing their own digital services tax, including France. The US government, prompted by American companies, have argued against the tax. The OECD, meanwhile, is holding talks to overhaul the global tax system, without much progress. India has in the past defended the tax, calling it “entirely consistent with India’s commitments under the WTO and international taxation agreements”.

‘Indian firms already subject to Indian taxes’

The government, in its response, said that e-commerce operators based in India are already subjected to domestic taxes for revenue generated in the country’s market. “However, in the absence of the EL, non-resident e-commerce operators (not having any Permanent Establishment in India but significant economic presence) are not required to pay taxes in respect of the consideration received in the e-commerce supply or services made in the Indian market,” it said. It added that the EL is levied only on non-resident e-commerce operators — that don’t have a permanent establishment in India.

“The threshold for this levy is Rs. 2 crores, which is very moderate and applies equally to all e-commerce operators across the globe having business in India. The levy does not discriminate against any U.S. companies, as it applies equally to all non-resident e-commerce operators, irrespective of their country of residence.” — Ministry of Commerce and Industry’s response to USTR (emphasis added)

No retrospective, no extraterritorial elements

Further, the government said that the levy has no retrospective element in it, as it was enacted before its effective data of April 1, 2020. It also does not have extra territorial application, since it applies only to revenue generated from India. “The purpose of the Equalization Levy is to ensure fair competition, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations,” it said.

“It is a recognition of the principle that in a digital world, a seller can engage in business transactions without any physical presence, and governments have a legitimate right to tax such transactions.” — Ministry of Commerce and Industry’s response to USTR (emphasis added)

The government said that it will examine the USTR’s findings, and will “take appropriate action keeping in view the overall interest of the nation”.

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