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Digital Service Tax has invited the policy making intervention...

Digital Service Tax has invited the policy making intervention, given the size of the

digital economy in India existing and its growth, the Govt. of India tapped into this

source of revenue.

• The “Digital Services Tax” (DST) is a levy on the overall revenues earned by

the supplier of specific digital services.

• India first introduced a 6% equalization levy in 2016, which was restricted to

online advertisement services only. It was known as “Digital Advertising Tax”

or DAT.

• From 27th March 2020, the Government of India expanded the scope of this

levy to include a range of digital services offered in India by foreign and non -

resident digital service providers. The digital services include but are not

limited to digital platform services, digital content sales, software as a service,

and numerous other categories of digital services.

• The transactions are to be taxed at 2 per cent on the revenue generated

from India. The minimum revenue threshold being INR 20000000/- (INR 20


• DST is aimed at ensuring that non-resident, digital service providers pay their

fair share of tax on revenues generated in the Indian digital market. India’s 2%

DST is levied on revenues generated from digital services offered in India,

including digital platform services, digital content.

Concerns Raised by United States Trade Representative (USTR) &

Counterclaims by India

Concerns were raised by the United States that India’s DST has an adverse impact

on American commerce. Hence, an investigation under Section 301 of the US Trade

Act, 1974, was conducted by the USTR. Section 301 authorizes USTR to appropriately

respond to a foreign country’s action that is discriminatory and negatively affects US


The USTR report dated 6th January 2021 found the DST to be discriminatory on two


• First, it states that the DST discriminates against US digital businesses

because it specifically excludes from its ambit domestic (Indian) digital


• Second, according to the report, the DST does not extend to identical

services provided by non-digital service providers.

India’s Stand

India clarified that the DST itself in no way discriminates based on the size of

operations or nationality.

• It may predominantly appear that DST is applicable to US companies because

the market for digital services is dominated by US-based firms.

• Further, any company that has a permanent residence in India is excluded

since it is already subject to tax in India.

Changes brought by the Finance Act, 2021

• Vide the Finance Act 2021, the Government has clarified that “consideration

received or receivable” shall include consideration received by a foreign/non-

resident e-commerce entity irrespective of the fact whether (I) the e-commerce

operator owns the goods or not. (II) the service provided is facilitated by the

operator or not.

• Further, pursuant to the latest amendments made to the Finance Act, 2021, it

has been further clarified that DST shall not be applicable in case the goods

sold by a non resident/foreign entity are owned by a person resident in India or

by the Permanent Establishment of a foreign entity.

Way Forward

• The core problem that the international tax reform seeks to address is that

digital corporations, unlike their brick-and-mortar counterparts, can operate in

a market without a physical presence.

Therefore, taxing in a particular jurisdiction may not augur well with the growth

of the digital economy.

• To overcome this challenge, countries suggested that a new basis to tax, say,

the number of users in a country, could address the challenge to some extent.

The EU and India were among the advocates of this approach.

• While the digital economy and its implications continue to evolve, the

multilateral solution at the level of the OECD must be expedited.

• Moreover, it would also require political consensus on multiple issues, including

sensitive matters such as setting up of an alternative dispute resolution process

comparable to arbitration.

For any further query kindly contact :

Partner, Rakhee Biswas

Partner, Syed Tamjeed Ahmad

DISCLAIMER: This is for mere information purpose and should not be construed a legal


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