THE US administration has held that India's 2% digital service tax (DST) is discriminatory and restricts American companies, and is inconsistent with international tax principles.

"Our investigation indicates that India's DST discriminates against U.S. digital services companies. India's DST is discriminatory on its face. The law explicitly exempts Indian companies, while targeting non-Indian firms… This is discrimination in its clearest form," it said.

The United States Trade Representative (USTR), in its findings of a Section 301 probe of the Trade Act, noted that of the 119 organisations that are likely subjected to India's equalisation levy, 72% or 86 were American companies.

India had amended the Finance Bill 2020-21 to impose the 2% equalisation levy on revenue generated by non-resident companies with a range of e-commerce supply of services, including digital platform services, digital content sales, data-related services and several other categories. E-commerce operators with a turnover of over Rs 2 crore, are obligated to pay the tax at the end of each quarter.

Section 301 of the US Trade Act empowers the USTR to investigate a trading partner's policy action that may be deemed unfair or discriminatory and negatively affects US companies and take appropriate action, including tariff-based and non-tariff-based retaliation.

The US also called the DST "unreasonable" because it contravenes international tax principles by failing to provide tax certainty with ambiguous language of the scope of taxable services and taxing companies with no permanent establishments in the country.

Further, they said that the DST taxes companies' revenue rather than their income which is inconsistent with the international tax principle for corporate taxation.

The Section 301 investigations against DSTs adopted by India, Italy and Turkey were initiated in June 2020, and later expanded to include the UK, Brazil and the European Union.

The USTR said it requested for consultations with India on the issues involved in the investigation and they were held on 5 November, 2020.

India had defended its position and emphasised that the equalisation levy was "not discriminatory" and was fully consisted with the World Trade Organisation and other international tax regimes.

"It was also clarified that the equalisation levy was applied only prospectively, and has no extra-territorial application, since it is based on sales occurring in the territory of India through digital means," said the Indian Ministry of Commerce and Industry.

It argued that the DST seeks to ensure a level-playing field with respect to e-commerce activities undertaken by entities resident in India, and those that are not resident in India, or do not have a permanent establishment in India.

"It is a recognition of the principle that in a digital world, a seller can engage in business transactions without any physical presence, and governments have a legitimate right to tax such transactions," India said.

The government said they will examine the USTR decision and take appropriate action keeping in view the overall interest of the nation.