Digital Service Tax Has Invited The Policy Making Intervention… – Tax Authorities

To print this article, all you need is to be registered or login on

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
    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
    (Indian) digital

  • Second, according to the report, the DST does not
    extend to identical
    services provided
    by non-digital service providers.

India’s Stand

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.

Way Forward

  • 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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.


Taxing Gifts — Circular Adding To Confusion

Economic Laws Practice

From July 1, a new TDS provision (Section 194R) is being introduced in the Income Tax Act with a view to taxing benefits and perquisites provided by one person to another.