On January 6, 2021, the office of United States Trade Representative (USTR) published a report concluding that the 2% digital services tax (DST) introduced by the Indian government, vide the 2020 Finance Act, discriminates against U.S. businesses, contravenes settled principles of international tax law, and restricts U.S. commerce. The report was published following an investigation conducted by USTR under section 301 of the U.S. Trade Act, 1974, which authorizes USTR to appropriately respond to a foreign country’s action that is discriminatory and negatively affects U.S. commerce.
India’s 2% DST is levied on revenues generated from digital services offered in India, including digital platform services, digital content sales, and data-related services. Pertinently, India was one of the first countries in the world to introduce a 6% equalisation levy in 2016, but the levy was restricted to online advertisement services (commonly known as “digital advertising taxes” or DATs). The 2020 DST, however, is broader in scope and extends to all kinds of digital transactions.
Broadly, USTR report finds the DST to be discriminatory on two counts. Firstly, it states that the DST discriminates against U.S. digital businesses because it specifically excludes from its ambit domestic (i.e., Indian) digital businesses. And secondly, the DST is discriminatory because, according to the report, it does not extend to identical services provided by non-digital service providers. While both these findings may seem justified on first blush, they are wholly misplaced and disregard the background and context in which the DST was introduced.