Digital Service Tax on ecommerce business: controversy and way ahead

The central government levied a 2% Digital Service Tax (“DST”) on the goods and services of international e-commerce businesses with an annual turnover of at least Rs. 2 crore, including Amazon, Walmart-owned Flipkart, and others, in its Finance Bill of 2020–21.

The US Trade Representative believed that this constituted discrimination against American businesses and broke the rules of international tax law because the majority of these overseas enterprises are American. In July of this year, the US government placed a 25% duty on imports from India, but it was quickly lifted.

The digitalization of economies and cross-border trade have posed new challenges to policymakers trying to tax company profits. The existing international tax system was designed in the age of brick-and-mortar commerce and only allows governments to tax firms with a physical presence in their country. Many countries, including France, Britain, and Italy, have proposed digital services taxes (DSTs) that tax companies based on their digital presence as well.

Significance for India

While the US withdrew from the tariff, India has not yet stopped the tariffs because the worldwide tax regulations have not yet taken effect. However, an agreement between India and the US will count the Equalization Levy as a credit against subsequent taxes. From April 1, 2022, to either March 31, 2024, or whenever the global taxes are resolved, such credits will be recorded. The US Department of Treasury has praised the agreement with India, but the Indian government hasn’t given its thoughts on it. Even tech behemoths like Amazon, Google, and others are keeping quiet about the most recent tax regulations that may affect them.

In October, the G20 summit and the Organisation for Economic Co-operation and Development meeting saw an international agreement on new global taxation rules. This includes that multinational firms have to pay at least 15% of their total revenue in each country they are operating in. This would mean that companies like Microsoft, Google, Amazon, etc., must pay taxes for their operations in India.

Global response over the scheme

Concerns were raised by the United States that India’s Digital Services Tax has an adverse impact on American commerce. Hence, an investigation under Section 301 of the United States Trade Act of 1974 was conducted by the United States Trade Representative. Section 301 enables the United States Trade Representative to appropriately respond to a foreign country’s action that is discriminatory and negatively affects US commerce.

The United States Trade Representative report, found the Digital Services Tax to be discriminatory on two counts.

• First, it states that the Digital Services Tax discriminates against US digital businesses because it specifically excludes from its ambit domestic (Indian) digital businesses.
• Second, according to the report, the Digital Services Tax does not extend to identical services provided by non-digital service providers.

India’s stand

India clarified that the Digital Services Tax itself in no way discriminates based on the size of operations or nationality.

• It may appear that the Digital Services Tax is applicable to companies in the United States because the market for digital services is dominated by United States-based firms.
• Further, any company that has a permanent residence in India is excluded since it is already subject to tax in India.
  Changes brought by the Finance Act, 2021
• In the Finance Act 2021, the government has clarified that “consideration
  received or receivable” shall include consideration received by a foreign or non-resident e-commerce entity irrespective of the fact of whether (I) the e-commerce
  operator owns the goods or not. (II) if the service provided is facilitated by the operator or not.
• Further, pursuant to the latest amendments made to the Finance Act, 2021, it has been further clarified that Digital Services Tax shall not be applicable in cases where the goods sold by a non-resident or foreign entity are owned by a person resident in India or by the Permanent Establishment of a foreign entity.
• The core problem that international tax reform seeks to address is that digital corporations, unlike their brick-and-mortar counterparts, can operate in a market without a physical presence. Therefore, taxing in a particular jurisdiction may not augur well with the growth of the digital economy in that jurisdiction.

DST is a temporary option outside of tax treaties as nations adjust their response to opposing demands for tax sovereignty. It has the advantage of charging incomes that are currently exempt from tax and makes room for negotiations on a comprehensive, long-term solution to this problem.