India’s Digital Tax: Rules Where Levy is Applicable, US Response

Offshore e-commerce firms that have a permanent establishment in India or pay income tax in India are exempt from the two percent equalization levy.

Meanwhile, the USTR has temporarily suspended retaliatory tariffs – imposing additional 25 percent tariffs on 40 Indian products – so countries can reach an international consensus on the taxation. The US finds the imposition of an equalization levy or digital services tax on non-resident e-commerce companies to be discriminatory as they affect US commerce.

India’s digital tax or equalization levy was introduced in April 2020 for foreign e-commerce sellers of goods and services to level the playing field with local businesses who pay taxes in India. As per the latest change to India’s tax law, foreign e-commerce companies will need to segregate inventory of resident and non-resident sellers on their platforms to make clear where the levy will be applicable.

On March 23, the Indian parliament confirmed changes to the 2021 Finance Bill, including clarity on the digital equalization levy.

India introduced the digital tax in April 2020 for foreign companies selling goods and services online to customers in India and showing annual revenues more than INR 20 million (approx. US$275,404).

When will the tax not apply?

The government has clarified that offshore e-commerce firms that sell through an Indian arm will not have to pay the two percent equalisation levy.

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This means that foreign e-commerce platforms with an Indian permanent establishment or paying income tax in India will not be subject to the digital tax.

More specifically, if the goods and services sold on a foreign e-commerce platform are owned or provided by an Indian resident or Indian permanent establishment, they will not be subject to the two percent equalization levy.

To ensure this assessment is clear, tax authorities will require that foreign e-commerce providers of goods and services in India clearly stipulate whether the inventory is sold by resident or foreign sellers on their platforms.

As per industry watchers and tax experts, foreign companies following the online marketplace model will need to segregate the sale prices of the items on their sites.

India’s digital tax: Government position is not unique

Over the last five years, India has been aggressively pushing for increase in digital transactions and the government has no intention to obstruct digital commerce. The finance minister, Nirmala Sitharaman, explained that the equalisation levy was imposed “to give level playing field between Indian businesses who pay tax in India and foreign e-commerce companies who do business in India but do not pay any income tax here.”

India is not alone in its imposition of such a levy on digital sellers, which has been deemed as discriminatory by the US as it applies to US firms.

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India’s Position on Taxing Foreign Digital Economy Firms

For example, France imposes a three percent digital services tax on revenues generated in the country by digital companies, wherever they are established, and if they make annual supplies of taxable services of more than €25 million (approx. US$29.54 million) in France and €750 million (approx. US$886.33 million) worldwide.

In the ASEAN region, Singapore, Indonesia, and Malaysia impose a digital service tax with Thailand announcing forthcoming plans to tax its foreign digital service providers.

Meanwhile, negotiations are underway at the Organisation for Economic Cooperation and Development (OECD) involving 140 countries to overhaul international tax rules given the fast growth of internet economies. The OECD’s decision on cross-border tax rules will provide clarity on the tax liability of companies providing digital services or selling online. This is expected by mid-2021.

The countries that currently impose the digital tax point to how internet giants or large e-commerce platforms are able to ‘book profits in low-tax countries’ regardless of where their customers are located – which necessitated changes in the existing framework of international taxation.

US position on the digital tax

The office of the United States Trade Representative (USTR) has come down heavily on the digital tax imposed on online platforms by various countries, as leading firms are of American origin. The USTR stated that such a levy was discriminatory to US commerce and actionable under its law – Section 301, Trade Act of 1974.

USTR has been conducting a Section 301 investigation into India’s levy of the two percent digital services tax / equalization levy; it has also done an investigation on France’s imposition of the digital tax.

Following its investigations, the US trade body announced it would be imposing punitive tariffs on India and five other countries (UK, Italy, Spain, Turkey, and Austria) as a retaliatory measure; for France this was indefinitely postponed.

For India, that would have entailed additional 25 percent tariffs on 40 Indian products worth US$119 million (estimated traded value in 2019); the products include shrimps, basmati rice, gold and silver items, bamboo products, wood furniture, cigarette paper, token-operated games for arcades, cultured pearls etc.

Nevertheless, the USTR suspended the retaliatory tariffs almost immediately – to allow countries to reach a consensus on international tax issues through the Organisation for Economic Co-operation and Development (OECD) and the G20 processes. According to a June 2 press release by the body: “The final determination in those investigations is to impose additional tariffs on certain goods from these countries, while suspending the tariffs for up to 180 days to provide additional time to complete the ongoing multilateral negotiations on international taxation…”

The US Federal Register notices announcing and suspending the trade actions in the six investigations may be found here.

This article was originally published March 25, 2021. It was last updated June 3, 2021.

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