Despite growing animosity from the United States and President Donald Trump over India’s equalisation levy on non-resident companies offering digital services in India, government officials are reportedly undeterred by the pressure, seeing hope in the fact that several other countries have similar proposals and in a yet-to-be accepted framework by the Organisation for Economic Co-operation and Development (OECD) that has seen the support of over 130 nations.
According to government officials speaking to the Economic Times, India expects many other countries to adopt the same position and will not roll back its own levy. However, another ET report from earlier in the day also citing officials saying that the government was rethinking the levy on account of its impact on Indian businesses.
A month after taking India off its list of “developing” nations, the office of the United States Trade Representative (USTR) had announced a probe into the plans of 10 countries including India to implement a “Digital Services Tax”.
Often dubbed as the “Google Tax”, such tax proposals have been proposed by groupings such as the OECD and EU, as well as by nations like Austria, Brazil, the Czech Republic, Indonesia, Italy, Spain, Turkey and the United Kingdom.
Since these taxes would affect US-based companies like Netflix, Amazon and Google, the USTR announced a probe into such measures that “unfairly” target American tech companies. The investigation, conducted under Section 301 of the Trade Act, which was the legal provision that allowed the US to levy a 25 per cent tariff on Chinese imports in 2018.
However, the Indian government sources speaking to ET said that the tax was being levied to all countries equally, and did not single out the US.
A two per cent equalisation levy became effective on April 1, 2020 with the first instalment due on July 7. In 2016, India introduced the first equalisation levy, a six per cent tax on online/digital advertisements and related services.
The OECD framework is part of an initiative to tackle Domestic tax base erosion and profit shifting (BEPS) among multinational companies, which is estimated to cost nations $100-240 billion in lost revenue annually. Digital companies alone could be liable for up to $100 billion of that amount, according to the OECD's calculation.
Under the OECD Inclusive Framework on BEPS, 135 countries have announced 15 actions to tackle BEPS—the first of which concerns “Tax Challenges Arising from Digitalisation”.
The OECD has committed to finding a consensus-based solution to the problem of a digital tax by the end of 2020—with the United States being a firm opponent of this, saying they would have a discriminatory effect on US businesses.
The pending decision of the OECD to agree to a framework to levy such taxes has led to countries unilaterally imposing them. This has met with opposition from the US.
After France announced it would be implementing its own digital tax, the country met with heavy pressure from the Trump administration including a threat to tax imported French wine, cheese and champagne by up to 100 per cent. In January, France agreed to hold off on imposing new tariffs till 2021. However, by May, the effect of the novel coronavirus on state revenues prompted France to announce plans to carry on with the levy regardless of the OECD decision.
“Never has a digital tax been more legitimate and more necessary,” Finance Minister Bruno Le Maire told Reuters. While France’s tax was to the tune of three per cent, the Czech Republic’s proposal was for a 7 per cent tax, with plans to reduce it to 5 per cent.
