Context: Recently, the office of the United States Trade Representative (USTR) has initiated investigations into taxes adopted or under consideration by 10 nations, including India, on revenues of American digital service companies like Netflix, Airbnb etc.
Digital Services Tax

• 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.

Key Points

• The US is probing the 2 percent DST that India adopted in March and which went into effect on April 1, 2020.
• 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 by USTR against other key trading partners of the US, including India.
• 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.

Outcome

• 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.
• India is expected to respond to the move by submitting its responses to the USTR, with the main line of argument likely to be that the levy is in compliance with India’s commitments under the 1995 General Agreement on Trade in Services and is applicable on all global companies, not just American ones.

Concerns

• In the backdrop of an improper functioning of the World Trade Organization (WTO), the move could signal the start of more unilateral action by the US especially on the digital services front.
• In India’s case, the probe could potentially affect the outcome of a bilateral trade deal that India has been looking to forge with the US.
• Further, India continues to be on the ‘Priority Watch List’ of the United States Trade Representative (USTR) for lack of adequate Intellectual Property (IP) rights protection and enforcement.