USTR proposes retaliatory tariffs against Indian goods over 2% digital tax

In retaliation to India’s digital tax (2 per cent) on foreign technology majors, the United States has proposed additional tariffs on a slew of Indian imports including basmati rice, sea food, jewellery, bamboo, semi-precious stones and pearls, among others.

A tariff of up to 25 per cent ad valorem on aggregate level of trade has been proposed, with an aim to mop up around $55 million, which is as much as what India will collect from US companies through the 2 per cent equalization levy. This follows investigation by the office of the US Trade Representative (USTR) last year under section 301 of the Trade Act, which concluded that India’s equalisation levy, was “actionable” under Section 301 of the Trade Act for being unreasonable, burdensome, and discriminatory against American companies like Amazon, Google, and Facebook, and inconsistent with international tax principles.

“In particular, USTR proposes to impose additional tariffs of up to 25 percent ad valorem on an aggregate level of trade that would collect duties on goods of India in the range of the amount of DST that India is expected to collect from US companies.”

Initial estimates indicate that the value of the DST payable by US-based company groups to India will be up to approximately $55 million per year,” said the USTR press release. “USTR further proposes that the goods of India subject to additional tariffs would be drawn from the preliminary list of products in the Annex to this notice, as specified by the listed eight-digit tariff subheadings,” it further said.

The 40 tariff sub-heads proposed for tariffs include Rattan furniture and parts, precious stone articles, gold rope necklaces and neck chains, cultured pearls, yarn, cigarette paper, and corks and stoppers.

The report, based on a Section 301 probe initiated in June last year, found India’s equalisation levy to be inconsistent with international tax principles because it failed to provide tax certainty, targeted revenues unconnected to a physical presence in India, and applied to revenue rather than income.

Highlighting the supposed discrimination, the report said of the companies that were subjected to India’s equalisation levy, 72 per cent were American.

Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm said, “Even in the Biden administration, there has been no let up in the pressure from the US on India’s equalization levy 2.0 which has been held to be discriminatory, unreasonable and in contravention of international tax principles.”

This action will force India to get to the negotiating table as US is a very important trading partner, he said.

While the levy applied only to digital advertising services till March 2020 at the rate of 6 per cent, the government widened the scope to impose 2 per cent tax on non-resident e-commerce players with a turnover of Rs 2 crore from April 1, 2020.

In fact, India has further expanded the scope of the 2 per cent equalisation levy by way of clarifications in the budget this yearto e-commerce supply or service when any activity, including acceptance of the offer for sale, placing the purchase order, acceptance of the purchase order, supply of goods or provision of services, partly or wholly payment of consideration, takes place online.

Besides, the levy would apply on gross consideration and not just the commission earned, leading to an outcry from industry.

These will apply retrospectively from April 1, 2020. The government has however, said that these are only clarificatory in nature and these transactions were always intended to come under the purview of EL.

Key global industry associations have also recently flagged tax uncertainty concerns regarding the expansion in scope of a 2 per cent digital tax in the Union Budget 2021-22, arguing that the ‘retroactive’ amendment would undermine the confidence in India’s regulatory environment and negatively impact the ease of doing business in the country.