US Chamber of Commerce, lobbying group urged India to delay a new digital tax; say firms battling fallout of coronavirus

The digital tax, inserted into budget amendments passed in March, caught the industry off guard as it was not part of the main proposals finance ministry had presented in Parliament a month earlier

Reuters April 29, 2020 11:43:03 IST
US Chamber of Commerce, lobbying group urged India to delay a new digital tax; say firms battling fallout of coronavirus

New Delhi: Nine lobbying groups including the US Chamber of Commerce have urged India to delay a new digital tax that will hit firms such as Facebook and Google as they are battling the fallout of the coronavirus, a letter seen by Reuters showed.

From 1 April India imposed a new 2 percent tax on foreign billings, or transactions where companies take payment abroad for digital services provided in India. The tax also applies to foreign e-commerce transactions on sites such as Amazon.com.

The tax would also apply to advertising revenue earned from companies overseas if it eventually “targets a customer” in India, the government said.

The tax, inserted into budget amendments passed in March, caught the industry off guard as it was not part of the main proposals finance ministry had presented in Parliament a month earlier.

The nine groups, from the United States, Europe, Asia and Australia, wrote a joint letter to India’s finance minister on Wednesday, urging that the tax be delayed by nine months and for an industry-wide consultation before implementation.

“The time frame within which this expansive new measure was approved and entered into force allowed for neither the dialogue nor the significant structural changes that would be necessary (for companies to comply),” said the letter.

US Chamber of Commerce lobbying group urged India to delay a new digital tax say firms battling fallout of coronavirus

Image: Reuters

“India is a critical market in which many of our members are deeply invested,” it added.

Other than the US Chamber of Commerce, signatories also included the Washington-based Information Technology Industry Council, the Asia Internet Coalition and DigitalEurope.

The government’s new tax is seen to be aimed at taxing foreign companies which have a significant local client base in India but were billing them through their offshore units, effectively escaping the country’s tax system.

The tax also applies to advertising revenue earned from companies overseas if those advertisements eventually target customers in India.

Google is particularly concerned that it will not be able to swiftly identify countries where advertising arrangements were in place to target Indian users, increasing technological and compliance requirements, one of the sources told Reuters.

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“Everyone is grappling. In the current downturn, the focus is on protecting the business hit due to coronavirus,” said the source who works for a global technology company and described the tax as a “big, big headache”.

The tax further risks souring India’s trade relations with countries such as the United States that had already been concerned with New Delhi’s stricter rules for sectors such as e-commerce.

“The new levy came out of nowhere ... It will disrupt India’s trade relations perhaps in ways the drafters of the levy did not anticipate,” said Roger Murry of the Alliance for Fair Trade with India, a group of US trade associations.

India-US tensions

The extent of possible compliance disruptions caused by the tax, a so-called equalisation levy, was not immediately clear, nor was how much India could garner from the tax.

Indruj Rai, a partner at law firm Khaitan & Co, told Reuters earlier that the government’s move appeared aimed at taxing foreign companies which had a significant local client base but were billing them through their offshore, or foreign, units.

“The timing of the introduction of the levy appears to be an attempt to increase revenue collections during the pandemic,” Rai added.

The new tax was inserted in the 2020-21 budget amendments passed last week, giving companies only a few days to prepare. The levy was not part of budget proposals first presented on 1 February.

India and the United States remain at loggerheads over a wide array of tariffs.

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