 "India says equalisation levy does not discriminate against any US company")
India on Thursday said that two per cent equalisation levy (EL) does not discriminate against any US company as it applies equally to all non-resident e-commerce operators, irrespective of their country of residence.
The Commerce Ministry said in a release that office of US Trade Representative had on January 6 released its findings on the Section 301 investigation into India's Digital Services Tax (DST) and concluded that the equalisation levy is discriminatory and restricts US commerce.
It said similar determinations were also made against Italy and Turkey on the same day.
"The Government of India will examine the determination/decision notified by the US in this regard, and would take appropriate action keeping in view the overall interest of the nation," the release said.
It said that the US administration had announced the initiation of an investigation under section 301 of the US Trade Act, 1974 against the taxation on digital services adopted or under consideration by countries, including the equalisation levy applied by India.
Apart from Italy and Turkey, United Kingdom was also under investigation.
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With respect to India, the focus of the investigation was on two per cent EL levied on e-commerce supply of services.
"The purpose of EL is to ensure fair competition, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations. It is a recognition of the principle that in a digital world, a seller can engage in business transactions without any physical presence, and governments have a legitimate right to tax such transactions," the release said.
The US investigation included whether the EL discriminated against its companies, was applied retrospectively and diverged from its or international tax norms.
The release said that the US requested for consultations, and India submitted its comments to the USTR on July 15 this year and participated in the bilateral consultation in November emphasizing that the EL is not discriminatory but on the contrary seeks to ensure a level-playing field with respect to e-commerce activities undertaken by entities resident in India and those that are not resident in India or do not have a permanent establishment in India.
The release said it was also clarified that the EL was applied only prospectively, and has no extra-territorial application since it is based on sales occurring in the territory of India through digital means.
The release said India based e-commerce operators are already subject to taxes in India for revenue generated from the Indian market.
"However, in the absence of the EL, non-resident e-commerce operators (not having any permanent establishment in India but significant economic presence) are not required to pay taxes in respect of the consideration received in the e-commerce supply or services made in the Indian market.
"The EL levied at 2 per cent is applicable to non-resident e-commerce operator, not having a permanent establishment in India. The threshold for this levy is Rs 2 crores, which is very moderate and applies equally to all e-commerce operators across the globe having business in India," the release said.
"The levy does not discriminate against any US companies, as it applies equally to all non-resident e-commerce operators, irrespective of their country of residence," it added.
The release said there is no retrospective element as the levy was enacted before April 1, 2020 which is the effective date of the levy and does not have extraterritorial application.
In an assessment of the US investigation on India's Equalisation Levy, Clarus Law Associates, a law firm, reported several flaws in the report, claiming that the USTR report ignores the rationale of the EL, which is that the underlying policy objective and application of India's EL is to ensure that neutral and equitable taxation is applicable to e-commerce operators that are resident in India or have a physical presence in India, and those that are not resident in India.
"The USTR Report has also ignored India's reasoning that the current principles of taxation based on physical presence are inadequate to tax digital business models that derive considerable value from market jurisdiction, and the fact that the OECD BEPS Report on Action 1 in 2015, had laid out Equalisation Levy as one of the three options for the consideration of countries," Clarus Law Associates said.
The assessment also noted that USTR report's assessment was flawed because it ignores that a territorial connection or nexus is inherent when the online sales and provision of e-commerce services is in the territory of India, and erroneously characterizes EL as a "corporate tax" while it is a levy on the revenues generated from a sale occurring in India.
"The USTR completely ignores that existing international tax principles do not in any manner preclude the ability of sovereign governments to adapt and evolve tools of taxation and applicable levies to address the complexities of the digital economy," said the law firm.
It said India had raised this aspect as well pursuant to the bilateral consultations, but the US has not addressed this aspect.