Why controversy over digital services tax could create a new trade war

The OECD does recognise the need to reform international tax rules for taxation of digital businesses but so far hasn't arrived at a consensus on the scope and manner of taxation.

As the world stares at a looming recession, “Big Tech” businesses are thriving globally. E-commerce, subscriptions, and distributed business infrastructure have emerged as major revenue drivers. This has led more countries (Brazil, Spain, Czech Republic) and the European Union (EU) to consider and charter a domestic path towards digital taxation, as a source to augment the languishing fiscal revenues. These are popularly known as Digital Service Taxes (DSTs).

As most Big Tech businesses are headquartered in the United States (US), as a measure of countering growing “protectionism”, the US has decided to investigate the DSTs adopted or under consideration by 9 countries, including India, and the EU. These investigations will be undertaken under the US Trade Code, which empowers the US Trade Representative (USTR) to respond to actions of other trading partners that are perceived to be unfair or discriminatory.

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In India’s context, it contemplates an inquiry into the recently enacted Equalisation Levy (EL) on non-resident e-commerce companies. The origin of the EL dates back to 2016, when India enacted a 6 per cent EL (EL 1.0). It was confined in its scope to transactions relating to online advertisements or provision of digital advertising space by non-residents to Indian residents.

Recently, in March 2020, surprisingly, the scope of EL was expanded (EL 2.0). The provisions of EL 2.0 are broad and can potentially affect all ‘online’ transactions undertaken by e-commerce entities with Indian consumers. It is charged at the rate of 2 per cent on the consideration received by e-commerce entities for inter alia online sale of goods and/ or services. The levy announced in late March is made applicable from 1 April itself, leaving businesses with very little time for planning and implementation. The EL provisions are unilateral and are unlikely to be eligible for a credit in the home country.