Digital Service Tax has invited the policy making intervention, given the size of the digital economy in India existing and its growth, the Govt. of India tapped into this source of revenue.
- The "Digital Services Tax" (DST) is a levy on the overall revenues earned by the supplier of specific digital services.
- India first introduced a 6% equalization levy in 2016, which was restricted to online advertisement services only. It was known as "Digital Advertising Tax" or DAT.
- From 27th March 2020, the Government of India expanded the scope of this levy to include a range of digital services offered in India by foreign and non - resident digital service providers. The digital services include but are not limited to digital platform services, digital content sales, software as a service, and numerous other categories of digital services.
- The transactions are to be taxed at 2 per cent on the revenue generated from India. The minimum revenue threshold being INR 20000000/- (INR 20 million).
- DST is aimed at ensuring that non-resident, digital service
providers pay their fair share of tax on revenues generated in the
Indian digital market. India's 2% DST is levied on revenues
generated from digital services offered in India, including digital
platform services, digital content.
Concerns Raised by United States Trade Representative (USTR) & Counterclaims by India
Concerns were raised by the United States that India's DST has an adverse impact on American commerce. Hence, an investigation under Section 301 of the US Trade Act, 1974, was conducted by the USTR. Section 301 authorizes USTR to appropriately respond to a foreign country's action that is discriminatory and negatively affects US commerce.
The USTR report dated 6th January 2021 found the DST to be discriminatory on two counts.
- First, it states that the DST discriminates against US digital businesses because it specifically excludes from its ambit domestic (Indian) digital
- Second, according to the report, the DST does not extend to identical services provided by non-digital service providers.
India clarified that the DST itself in no way discriminates based on the size of operations or nationality.
- It may predominantly appear that DST is applicable to US companies because the market for digital services is dominated by US-based firms.
- Further, any company that has a permanent residence in
India is excluded since it is already subject to tax in
Changes brought by the Finance Act, 2021
- Vide the Finance Act 2021, the Government has clarified that
received or receivable" shall include consideration received by a foreign/non- resident e-commerce entity irrespective of the fact whether (I) the e-commerce
operator owns the goods or not. (II) the service provided is facilitated by the operator or not.
- Further, pursuant to the latest amendments made to the Finance Act, 2021, it has been further clarified that DST shall not be applicable in case the goods sold by a non resident/foreign entity are owned by a person resident in India or by the Permanent Establishment of a foreign entity.
- The core problem that the international tax reform seeks to address is that digital corporations, unlike their brick-and-mortar counterparts, can operate in a market without a physical presence.
Therefore, taxing in a particular jurisdiction may not augur well with the growth of the digital economy.
- To overcome this challenge, countries suggested that a new
basis to tax, say, the number of users in a country, could address
the challenge to some extent.
The EU and India were among the advocates of this approach.
- While the digital economy and its implications continue to evolve, the multilateral solution at the level of the OECD must be expedited.
- Moreover, it would also require political consensus on multiple issues, including sensitive matters such as setting up of an alternative dispute resolution process comparable to arbitration.
Originally published Apr 8, 2021.
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