The US launched an investigation, focusing on whether the tax in India and other countries discriminated against American companies, were retroactive, and reflected unreasonable tax policy.
India may face trade action from the US - similar to what France got - for its imposition of Google tax, according to industry and tax experts.
The US Trade Representative (USTR) recently announced 25 per cent additional duties on French products in retaliation for the European country’s digital services tax.
However, the US suspended clamping additional duties for 180 days to allow additional time for bilateral and multilateral discussion.
The action, which is part of a widening dispute between the US and countries proposing digital services taxes, could have a ripple effect on India after it expanded the scope of the equalisation levy, also known as Google tax, which was imposed in 2016 on all overseas e-commerce transactions originating in India at an additional 2 per cent.
This is because the majority of the global tech companies such as Google, Amazon, Facebook, Microsoft, and Apple are American and such proposals affect them the most.
“The nature of these levies is such that it’s difficult to find them fair in their present form.
"Reaching a multilateral solution remains the best bet to avoid double taxation and give a fair share of taxes to countries, but we don’t foresee a global consensus happening anytime soon,” said Amit Maheshwari, partner, AKM Global, a tax and consulting firm.
One has to keep in mind that typically when goods or services are supplied to the resident, non-residents are able to pass on the burden to Indian consumers, who, indirectly, bear the tax, he said.
Several global firms missed the July 7 deadline of depositing tax, expecting that the Indian government might review the levy.
Soon after this levy, a group of industry associations representing tech giants wanted the new tax withdrawn.
It also sought deferring the deadline due to the pandemic.
But in the absence of clarity, very few have paid the tax, resulting in a huge dip in collection.
“The US government has specifically called out the Indian equalisation levy as unfairly targeting companies there.
"The defence mounted by the Indian government is mainly based on the fact that the tax is non-discriminatory and applies equally to all non-residents,” said Rohinton Sidhwa, partner, Deloitte.
However, evidence from France, also cited by the USTR in its reports, suggests it was mainly US companies that are affected by the tax, he said.
The equalisation levy in India is distinctive in the sense it applies to financial intermediaries and banking services too, Sidhwa said.
When the US had pulled out of talks on the contentious digital tax, the Organisation for Economic Co-operation and Development had pointed out countries would apply unilateral measures, which could result in retaliatory steps by the US.
The US launched an investigation, focusing on whether the tax in India and other countries discriminated against American companies, were retroactive, and reflected unreasonable tax policy.
“The levy is wide in scope and has a low revenue threshold - so it will be difficult for the US to conclude that it discriminates against American internet companies,” said Akhilesh Ranjan, former member, Central Board of Direct Taxes.
Backing Ranjan’s view, Sanjay Sanghvi, partner, Khaitan & Co, said: “Since this threshold has not been aimed at any particular country’s companies or is not very high so as to affect only a particular country’s e-commerce operators, I see no justification for someone to say that India’s new digital tax levy is unreasonable or that it discriminates against US companies.”
