India to defend Equalisation Levy as a level-playing tax

India says the levy does not discriminate against any US companies as it applies equally to all non-resident e-commerce operators.

India will defend its Equalisation Levy, which is a non-discriminatory charge applied prospectively to ensure a level-playing field for e-commerce entities having permanent establishments in the country, two officials said on Saturday after the United States Trade Representative (USTR) proposed retaliatory trade actions against India.

The Equalisation Levy at 2% is applicable to non-resident e-commerce operators not having a permanent establishment in India. (Representational photo)

The USTR on Friday proposed the actions against India and some other countries that have imposed or are considering imposing digital service taxes (DSTs) or equalisation levy (EL) under section 301 of the Trade Act of 1974 on grounds of discrimination against the US-based digital companies. Retaliatory actions could include withdrawal of US trade concessions and higher duties on Indian exports.

The government will examine the proposed action with the stakeholders concerned and take suitable measures consistent with its trade and commercial interest and overall interest of its people, the officials said requesting anonymity.

“All e-commerce companies located in India pay taxes, but remotely located foreign digital firms, who are generating significant revenues from the Indian market, do not pay any tax in India. This puts firms located in India at a disadvantage, hence a 2% EL was imposed on remotely-located firms,” a second person said.

The USTR’s proposed move is targeted at the 2% EL levied by India on the e-commerce supply of services. On March 26, it also prescribed similar actions against the UK, Austria, Italy, Spain, and Turkey.

“USTR is proceeding with the public notice and comment process on possible trade actions to preserve procedural options before the conclusion of the statutory one-year time period for completing the investigations,” it said in a statement.

In January, USTR found that the levy adopted by Austria, India, Italy, Spain, Turkey, and the UK were subject to action under Section 301 because they discriminated against US digital companies, were inconsistent with principles of international taxation, and burdened US companies.

On the US request for bilateral consultations on this matter, India submitted its comments to USTR in July and November. “It was also clarified that the EL was applied only prospectively with no extra-territorial application since it is based on sales occurring in the territory of India through digital means,” the official quoted above said.

The EL fixed at 2% is applicable to non-resident e-commerce operators not having a permanent establishment in India. The threshold for this levy is ₹2 crore, which is very moderate and applies equally to all e-commerce operators across the globe having business in India, he said.

“The levy does not discriminate against any US companies as it applies equally to all non-resident e-commerce operators, irrespective of their country of origin.”

The Equalization Levy recognises the principle that in a digital world, a seller can engage in business transactions without any physical presence, and governments have a legitimate right to tax such transactions, the official said.

“There is no retrospective element as the levy was enacted before the 1st day of April 2020 which is the effective date of the levy. It does not have extraterritorial applications as it applies only to the revenue generated from India. In addition, EL was one of the methods suggested by 2015 OECD/G20 Report on Action 1 of BEPS Project which was aimed at tackling the taxation challenges arising out of digitisation of the economy,” the commerce ministry said in a statement issued in January.

The statement was issued in a response to USTR’s findings on the section 301 investigation into India’s EL.