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US Suspends Retaliatory Tariffs on India

  • 07 Jun 2021
  • 6 min read

Why in News

Recently, the US suspended imposition of retaliatory tariffs against six countries, including India, that had begun imposing digital services tax on companies such as Google and Facebook.

  • Other than India, the countries slapped with this tariff proposal are Austria, Italy, Spain, Turkey, and the United Kingdom.

Digital Services Taxes

  • DSTs are the adopted taxes on revenues that certain companies generate from providing certain digital services. E.g. digital multinationals like Google, Amazon and Apple etc.
  • The Organisation for Economic Cooperation and Development (OECD) is currently hosting negotiations with over 130 countries that aim to adapt the international tax system. One goal is to address the tax challenges of the digitalization of the economy.
    • Some experts argue that a tax policy designed to target a single sector or activity is likely to be unfair and have complex consequences.
    • Further, the digital economy cannot be easily separated out from the rest of the global economy.

Key Points

  • Background:
  • Reason for Suspension:
    • Multilateral Solution:
      • To allow time for ongoing international tax negotiations to continue. The US is seeking a multilateral solution while maintaining the option of imposing tariffs under Section 301 if warranted in the future.
    • Damage to Global Economy:
      • The six countries potentially impacted are passing through a weak post­ Covid-19 recovery and opening a new trade war front could be damaging not only to them, but also to the broader global economy.
      • The combination of depressed economic activity owing to the effects of the pandemic and tectonic shifts in global supply chains engendered by the US’ trade war with China has already left many economies in a weakened condition.
    • Change in Administration:
      • Under the previous US government (Trump) USTR was used to promote what his administration considered to be free, fair and reciprocal trade, specifically to close the gap or balance of trade between the US and foreign governments.
      • However, the new administration (Biden) appears to be seeking a middle path of waving the stick of the USTR while allowing some space for continued tax negotiations with the nations concerned.
  • Impact on India:
    • Loss of Revenue:
      • The tax levied by the Finance Bill, 2021, could yield approximately USD 55 million annually.
      • Negotiations with the US that may result in the scaling back of this tax would imply that a part of this revenue would be lost to the exchequer, depending on the final rate agreed.
    • Impact on Exports:
      • Close to USD 118 million of India’s exports to the US would be subject to the tariff proposed by the USTR, impacting 26 categories of goods such as:
        • Basmati rice, cigarette paper, cultured pearls, semi-precious stones, certain gold and silver jewellery items and specific types of furniture products.
    • Growth Prospects:
      • Any escalation matrix of retaliatory taxation with the US would damage its growth prospects at a crucial point in its laborious recovery.
      • However, India will also not be able to simply abandon its articulated intent to tax global tech firms, which have generally enjoyed low­tax operations across numerous jurisdictions.

India's Tax on Digital Companies

  • The government had moved an amendment in the Finance Bill 2020-21 imposing a 2% digital service tax (DST) on trade and services by non-resident e-commerce operators with a turnover of over Rs. 2 crore.
    • This effectively expanded the scope of equalisation levy that, till last year, only applied to digital advertising services.
    • Earlier, the equalisation levy (at 6%) was introduced in 2016 and imposed on the revenues generated on business-to-business digital advertisements and allied services of the resident service provider.
  • The new levy came into effect from 1st April 2020. E-commerce operators are obligated to pay the tax at the end of each quarter.
  • The idea is to tax payments made to offshore entities which do not have a physical presence here and therefore the income tax department cannot subject such income earned from India to tax.

Way Forward

  • As India is racing towards becoming a digital giant, the 2% DST should be negotiated to avoid any hurdles in its implementation. India should consider its options carefully at this juncture.
  • Further, there needs to be international consensus on taxation on a digital economy.

Source:TH

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