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What is Digital Services Tax?

Digital Services Taxes:

The United States recently announced 25% tariffs on over $2 billion worth of imports from six nations over their digital services taxes, but immediately suspended the duties to allow time for international tax negotiations to continue.

  • The S. Trade Representative’s office had approved the threatened tariffs on goods from Britain, Italy, Spain, Turkey, India and Austria after a “Section 301” investigation concluded that their digital taxes discriminated against U.S. companies.
  • The potential tariffs aim to equal the amount of digital taxes that would be collected from U.S. firms.

About the Digital Tax:

  • India was the one of the first countries to introduce a 6 per cent equalisation levy in 2016, but the levy was restricted to online advertisement services.
  • However, India introduced the digital tax in April 2020 for foreign companies selling goods and services online to customers in India and showing annual revenues of more than INR 20 million.
  • India has expanded the scope of the equalization levy over the last few years, to tax non-resident digital entities.
  • While the levy applied only to digital advertising services till 2019-20 at the rate of 6 percent, the government in April last year widened the scope to impose a 2 percent tax on non-resident e-commerce players with a turnover of Rs 2 crore.
  • The scope was further widened in the Finance Act 2021-22 to cover e-commerce supply or service when any activity takes place online.
  • Since May 2021, this also includes any entity that systematically and continuously does business with more than 3 lakh users in India.
  • Offshore e-commerce firms that sell through an Indian arm will not have to pay.
  • This means if the goods and services sold on a foreign e-commerce platform are owned or provided by an Indian resident or Indian permanent establishment, they will not be subject to the two percent equalization levy.