India's 2 per cent digital services tax on e-commerce supply discriminates against US companies and is inconsistent with international tax principles, according to a US Trade Representative (USTR) investigation. The finding paves the way for potential retaliatory tariffs but the USTR did not immediately specify actions to counter such taxes.
USTR's investigation said the Indian levy discriminates against American companies, unreasonably contravenes international tax principles, and burdens or restricts US commerce. The latest report of the office of the USTR said that "our investigation indicates that India's DST discriminates against US digital services companies".
It observed that India's digital services tax (DST) is discriminatory on its face, as the law explicitly exempts Indian companies, while targeting non-Indian firms. "The result is that US '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 report said.
According to the report, an Indian government official also confirmed that the very "purpose" of the DST is to discriminate against non-resident foreign companies, explaining that "[a]ll parts of the digital taxation incident should be on the foreign player, because if the incidence is passed on to the Indian player, then it doesn't really serve the purpose". Moreover, it said the DST targets digital services but not similar services provided non-digitally.
According to the report, because US companies are global leaders in the digital services sector, US companies face an inordinate share of tax burden. Indeed, of the 119 companies that USTR has identified as likely liable under the DST, 86 (or 72 per cent) are US companies, it said.
The USTR report said the investigation also indicates that India's DST unreasonably contravenes international tax principles. "At least three aspects of the DST are inconsistent with principles of international taxation," it said.
The aspects include stakeholders having found the text of the DST to be unclear and ambiguous, which creates uncertainty for companies regarding key aspects of the DST, including the scope of taxable services and the universe of firms liable to pay the tax. "India has published no official guidance to resolve these ambiguities. This amounts to a failure to provide tax certainty, which contravenes a core principle of international taxation," the USTR report said. Another aspect found by the investigation is that the DST taxes companies with no permanent establishment in India, contravening the international tax principle that companies absent a territorial connection to a country should not be subject to that country's corporate tax regime.
Besides, the DST taxes companies' revenue rather than their income. This is inconsistent with the international tax principle that income not revenue is the appropriate basis for corporate taxation, said the report. The investigation also indicates that India's DST burdens or restricts US commerce.
It observed that the DST is burdensome or restrictive in at least four ways. Firstly, it creates an additional tax burden for US companies. USTR estimates that the aggregate tax bill for US companies could exceed USD 30 million per year. Moreover, several aspects of the DST exacerbate this tax burden, including the DST's extraterritorial application, its taxation of revenue rather than income.
Besides, the unusually expansive scope of taxable digital services under the DST makes the tax particularly burdensome for US companies, said the report. "India's DST is an outlier: It taxes numerous categories of digital services that are not leviable under other digital services taxes adopted around the world. This brings more US companies within the scope of the DST, and makes the measure significantly more burdensome," the investigation found.
The USTR report said the DST forces US companies to undertake costly measures to comply with the tax's new payment and reporting requirements. This includes the re-engineering of existing systems to collect and organise new and different types of information. USTR's analysis indicates that compliance costs could run into millions of dollars for each affected company, it said. The probe also found that DST burdens US companies by subjecting them to double taxation.
"In summary, as set out in detail in this report, USTR's investigation indicates that India's DST is discriminatory, unreasonable, and burdens or restricts US commerce, and thus, is actionable under Section 301," the investigation concluded.
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