Context: The USTR’s Section 301 has called out India’s digital taxation regime, claiming it is not in sync with international tax principles.
Key Points

• The Office of the United States Trade Representative (USTR) is an agency of professionals dealing with trade issues.
• The Office of the U.S. Trade Representative (USTR) is responsible for developing and coordinating U.S. international trade, commodity, and direct investment policy, and overseeing negotiations with other countries.
• The Section 301 report, a flagship publication of USTR has said that the digital services taxes adopted by India, Italy and Turkey discriminate against U.S. companies and are inconsistent with international tax principles.

India’s Digital Service Tax

• India’s DST imposes a 2% tax on revenue generated from a broad range of digital services offered in India, including digital platform services, digital content sales, digital sales of a company’s own goods, data-related services, software-as-a-service, and several other categories of digital services.
• India’s DST explicitly exempts Indian companies—only “non-residents” must pay the tax.

‘Tax impacts U.S. firms’

• USTR has concluded the digital taxes imposed by France, India, Italy and Turkey discriminate against big U.S. tech firms, such as Google, Facebook, Apple and Amazon.com, referred to as the GAFA tax.
• The issues of contention are the application of taxation to revenue rather than income, extraterritorial application, and failure to provide tax certainty.

India’s defence

• India has defended the 2% equalisation levy saying that it does not discriminate against U.S. companies as it applies uniformly across all non-resident e-commerce operators.
• The Commerce and Industry Ministry has said the intention of imposing such a levy is to create an ecosystem that fosters fair competition and reasonableness.
• Another reason behind the levy is to exercise the sovereign right of the government to tax businesses that have a close nexus with the Indian market through their digital operations.
• The charge of extraterritorial application is not accurate as it applies only to the revenue generated from India.