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

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’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
  India.
  Changes brought by the Finance Act, 2021




• Vide the Finance Act 2021, the Government has clarified that
  “consideration
  
  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
  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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