The digital tax conundrum, here's what expert has to say

United States Trade Representative (USTR) has initiated the process to retaliate against India and 5 other countries for levying a digital service tax on foreign companies that have impacted US Enterprises.

On its part, India has maintained that it will take suitable action on any proposed US retaliatory action. India had imposed a 2 percent equalisation levy on sales of products and services by e-commerce companies in budget 2020.

Dinesh Kanabar, CEO of Dhruva Advisors spoke to CNBC-TV18’s Nisha Poddar to throw light on this development.

Kanabar said, “It was in the last budget, the budget of 2020 that India introduced this 2 percent extra digital tax. It came just in the act and got passed and sure enough, after a lot of representation it got implemented from October 1st to give companies 6 months’ time to recalibrate their IT systems.”

“Thereafter, the US government in June started looking at sanctions in section 301 of their trade rules. There was an open paper consultation which was held and it was in January 2021 that the USA came out with a report on India digital services tax and pursue that report now the USA is proposing to retaliate against the levy of the digital services tax by putting tariff restrictions, ad valorem tariff restrictions of up to 25 percent on various goods.”

Kanabar added, “The entire basis of USA to levy this ad valorem duty is to say that there is discrimination because it does not apply to Indian companies and it applies to non-residents. I think that comparison is absolutely incorrect. This, first of all, applies to all foreign companies, the USA or otherwise. In USA’s own assessment 72 percent of the companies that are likely to be covered are American, but this is not targeted to US companies - number one.”

“Number two- if you have to compare resident companies then are they treated on par with companies which have got a permanent establishment, the answer is absolute yes. Because if you do have a permanent establishment in India then you pay taxes on your net income and not on the gross income.”