Understanding Digital Services Tax.
                     UNDERSTANDING 
DIGITAL SERVICES TAX
Introduction
• Recently, the United States Trade Representative (USTR) published a report concluding that the 
2% digital services tax (DST) introduced by the Indian government ( by the 2020 Finance Act) 
discriminates against US businesses and contravenes settled principles of international tax law.
Source: www.drishtiias.com
Aim of DST
• The 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 sales, and data-related services.
Source: www.drishtiias.com
Digital Economy 
• As the digital economy is increasingly becoming a separate sector of the economy itself, 
developed countries like the US must understand that it would be now difficult to ring-fence the 
digital economy from the rest of the economy for tax purposes.
Source: www.drishtiias.com
Concerns Raised by USTR & Counterclaim
• The USTR report found the DST to be discriminatory on two counts.
– First, it states that the DST discriminates against US digital businesses because it specifically excludes from its ambit 
domestic (Indian) digital businesses.
– Second, according to the report, the DST does not extend to identical services provided by non-digital service 
providers.
Source: www.drishtiias.com
Rationale of DST
• Prolonged International Tax Law Negotiation: The agenda to reform international tax law so that 
digital companies are taxed where economic activities are carried out was formally framed within 
the OECD’s base erosion and profit shifting program.
Source: www.drishtiias.com
Changing International Economic Order
• The proliferation of digital service taxes (DSTs) is a symptom of the changing international 
economic order.
• Countries such as India which provide large markets for digital corporations seek a greater right 
to tax incomes.
Source: www.drishtiias.com
Asymmetrical Digital Power
• The taxation of the digitaliized economy turned out to be a relatively contentious issue because 
there is a huge asymmetry in digital service providers and consumers.
• Further, a redistribution of taxing rights can have significant revenue implications for countries 
like India and the US. This makes a consensus-based solution harder to achieve.
Source: www.drishtiias.com
Associated Concerns With DST
• Retaliatory Tariffs: The USTR investigations could pose a threat of retaliatory tariffs, as similar 
tariffs were imposed by the US on France.
• Further, it could turn into a digital trade war-like scenario and could harm India’s Information and 
communication technology industry.
Source: www.drishtiias.com
Associated Concerns With DST Cont.
• Eventually Burdening Digital Consumers: Experts suggest that DST can be passed on to 
consumers. While the Indian customer may not pay this as a tax, this could mean higher prices, 
contrary to the claim that it taxes the company.
• Double Taxation: This was severely criticized by many countries as a unilateral measure that 
would result in double taxation.
Source: www.drishtiias.com
New Model of Digital Taxation
• 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.
Source: www.drishtiias.com
Conclusion
• As countries calibrate their response to competing demands for sovereignty to tax, DST is an 
interim alternative outside tax treaties. It possesses the advantage of taxing incomes that 
currently escape tax and creates space to negotiate a final, overarching solution to this 
conundrum.
Source: www.drishtiias.com