The United States recently announced tariffs of 25% on more than $ 2 billion in imports from six countries on its digital services taxes, but immediately suspended tariffs to allow time for tax negotiations international organizations to continue.
What prompted the United States to take such steps?
The US Trade Representative’s office had approved the threat of tariffs on goods from Great Britain, Italy, Spain, Turkey, India and Austria after a “Article 301” special report found that their digital taxes discriminated against U.S. businesses. The potential tariffs aim to match the amount of digital taxes that would be collected from US businesses.
The United States Trade Representative (USTR) has investigated under Section 301 of the United States Commerce Act of 1974, which authorizes him to respond appropriately to an action by a foreign country that is discriminatory and adversely affects American commerce.
So what is the United States Special Report 301? It primarily reflects the annual review of the global state of intellectual property (IP) rights protection and social oversight. The exam reflects the administration’s desire to encourage and maintain voluntary environments for innovation, as well as effective protection of scientific discipline and social control, in markets around the world, which not only benefit to American exporters, but also to national industries of scientific discipline in these markets.
According to the report, India’s Digital Services Tax (DST) discriminates in two ways: first, it specifically excludes Indian digital businesses from its scope; and second, according to the report, DSTs are not identical services provided by non-digital service providers.
What does India say in this?
The idea of the United States that Indian Daylight Saving Time is biased is not true. In the given diagram, most of the big tech companies are based in the United States. According to the USTR, 119 companies worldwide would likely be subject to DST, of which 86 are US companies! Thus, it may appear in the United States that daylight saving time is biased. Indian digital service providers will not pay DST due to the specific exemption provided by law (of course they are subject to Indian income tax).
What other countries are in this club?
France imposes 3% DST. In the Association of Southeast Asian Nations (ASEAN) region, Singapore, Indonesia and Malaysia are imposing a DST, with Thailand announcing plans to tax its foreign digital service providers. Wait, there is more. Negotiations are underway within the Organization for Economic Co-operation and Development (OECD) involving 140 countries to revise international tax rules given the rapidly growing internet economies.
The story so far
With advancements in technology, high speed internet and broadband services across the world, a business can run its operations smoothly without needing to be physically present in a particular country. A retail store in France can sell clothes directly to Indian customers without having a single storefront or a real seller! A gaming giant located in South Korea can bring players from all over the world to its platform through remote servers. A streaming giant in the United States can send its content digitally anywhere, anytime without a hitch.
As more and more companies join the crusade, it becomes imperative for governments to do something out of the blue. Because operating from a foreign country allows companies to avoid paying tariffs in other jurisdictions, even when dealing with customers there. Putting aside the obvious fact that local government could lose tax revenue, there is another problem that cannot be overlooked.
Now let’s put India in the spotlight. The Indian government wants local businesses to compete on an equal footing with their global peers. But this is rather impossible when the regulations allow them to operate in the country duty-free. Of course, the foreign company will have to pay taxes in its home country; but more often than not, the prices of companies are much lower elsewhere than in our country. So it is clear and obvious that local businesses are at a disadvantage here and that was certainly not acceptable to the Indian government.
So what should be done? Let’s go back to 2016.
In 2016, the Indian Minister of Finance pledged to oblige non-resident e-commerce operators to pay their dues. The government revealed the Equalization tax, a Law which made it possible to add a tax of 6% on non-resident Internet companies for advertising services rendered to Indian companies. This was known as the Digital Advertising Tax (DAT) or commonly the Google Tax., as a large chunk of online ad spending could be attributed to the search giant. And soon enough, large sums of money began to flow into the government treasuries (Rs 550 crores in 2017-2018). Most Internet companies thought that would be the end of it.
What’s the matter now? What is the digital services tax (DST)?
Everything was running smoothly until the Indian government in March 2020 extended the scope of the existing equalization tax to a range of digital services including e-commerce platforms. Any payment made by non-residents in relation to an Indian user will be subject to a 2% charge, ouch! This tax will come into effect when the goods or services are provided to an Indian resident, or when ordered through an Indian IP address. So if there are individuals and businesses ordering products through, say, an Amazon US or booking a hotel room through a foreign website, they have to pay this tax in full.
Let’s understand who exactly is a non-resident e-commerce operator. It designates a non-resident (foreigner) who owns, runs or manages an electronic platform for the sale of goods online or for the provision of online services, Amazon, Netflix, Cloud services are a few examples.
Should we be worried? Why?
Ultimately, this could weigh on digital consumers. Experts suggest that daylight saving time can be passed on to consumers. Although Indian customer may not pay this as tax, it might mean higher prices as they tax the Company. So, wait and see if this extra tax gets passed on to consumers and ends up adding a little extra burden to your Netflix bill, eh?
On the heavier side, the USTR’s investigations could pose a serious threat of tariff retaliation, as similar tariffs have been imposed by the United States on France. The United States is India’s largest trading partner and with which India has a trade surplus (India’s net exports are greater than net imports with the United States), this step could seriously hurt the economy of the country.
Additionally, it could turn into a digital trade war-like situation and harm India’s information and communications industry.