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USTR probe for taxing digital service companies

  • Category
    International Relations
  • Published
    25th Jun, 2020

The office of the United States Trade Representative (USTR) is initiating investigations into taxes adopted or under consideration by 10 nations, including India, on revenues of American digital service companies like Netflix, Airbnb, Uber, LinkedIn and Spotify.

Context

The office of the United States Trade Representative (USTR) is initiating investigations into taxes adopted or under consideration by 10 nations, including India, on revenues of American digital service companies like Netflix, Airbnb, Uber, LinkedIn and Spotify.

About

About Section 31 Report:

  • The Special 301 Report is prepared annually by the Office of the United States Trade Representative (USTR).
  • The USTR inquiry is under the US Trade Act of 1974 and Section 301 of this law, hence referred as ‘301 investigations’.
  • The US law mandates consultations with trading partners as and when a Section 301 investigation is initiated.
  • The Section 301 provision gives the USTR “broad authority” to investigate and respond to a foreign country’s action which may be “unfair” or “discriminatory” as well as negatively affect US commerce.
  • Adopted in 1974, it allows the US President to impose tariffs or other curbs on foreign nations.
  • India will also be accorded an opportunity to negotiate with the US and prevent the imposition of tariffs by reaching a comprehensive outcome, one the line of similar negotiations that are currently underway with France.

What is United States Trade Representative (USTR)?

  • Founded in 1962, the Office of the United States Trade Representative (USTR) has lead responsibility for developing and coordinating U.S. international trade, commodity and direct investment policy.
  • It is the lead trade negotiatorfor the United States in bilateral, regional and multilateral trade and investment agreements.
  • USTR is responsible for developing and implementing trade policies which promote economic growth, support efforts to protect the environment, advance core labor standards, and create new opportunities for U.S. businesses, workers, and agricultural products.
  • USTR also leads an interagency process to conduct reviews of the possible environmental effects of trade negotiations, sets and coordinates U.S. international trade, commodity, and direct investment policy.
  • It also leads or directs U.S. negotiations with other countries through entities such as the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA).

India’s case

  • Equalisation levy: India — in amendments to the Finance Act, 2020 in March-end — had expanded the ambit of the equalisation levy for non-resident e-commerce operators involved in supply of services, including online sale of goods and provision of services, with the levy at the rate of 2 per cent.
  • Equalisation levy at 6 per cent has been in force since 2016 on payment exceeding Rs 1 lakh a year to a non-resident service provider for online advertisements.
  • This is applicable for e-commerce companies that are sourcing revenue from Indian customers without having tangible presence here in the country.
  • Digital Service Tax: The US is probing the 2 percent DST that India adopted in March and which went into effect on April 1.
    • Over the past two years, various jurisdictions have taken under consideration or adopted taxes on revenues that certain companies generate from providing certain digital services to, or aimed at, users in those jurisdictions.
    • They are referred to as Digital Services Taxes, or DSTs.
    • The tax applies only to non-resident companies with annual revenues over $267,000, and covers online sales of goods & services to, or aimed at, persons in India.
    • The investigation has been initiated against other key trading partners of the US and is merely a first step.

US’s concern

  • The United States is concerned that many of its trading partners are adopting tax schemes designed to unfairly target our companies.
  • It wants take all appropriate action to defend its businesses and workers against any such discrimination.

Impact on India

In the current economic environment, clearly, the 301 announcement is not good news for India.

  • Effect on trade: In India’s case, it could potentially affect the outcome of a bilateral trade deal that the NDA government has been looking to forge with the US.
  • Unilateral actions: In the backdrop of an increasingly crippled World Trade Organization (WTO), the move could signal the start of more unilateral action by the Donald Trump administration, especially on the digital services front.
  • Tariff measures: Though, it is essentially a domestic inquiry, the implications for countries being investigated can be ominous. An affirmative finding results in the US administration engaging with the country, resulting in tariff measures should a country fail to address USTR’s findings.
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