Digital Service Tax Has Invited The Policy Making Intervention… – Tax Authorities
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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
- 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
- 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
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
- 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
Originally published Apr 8, 2021.
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