India’s Equalisation Levy, Digital Services Trade, and the Evolutionary Approach – Part II

[Ayushi Singh is a 5th year student at National Law University, Jodhpur]

As mentioned in the previous post, USA could challenge the equalisation levy and similar digital services taxes for violation of the most favoured nation [MFN] treatment under article I of the General Agreement on Trade in Services [GATS]. Before unpacking the possible arguments for an MFN action, some unique ambiguities surrounding digital services trade will be highlighted.

Academic Deliberations for Digital Services Trade

In the report following the investigation of the digital services tax [DST] in France [French Report], the DST was declared to be extraterritorial in nature. The French Report stated that DSTs are levied upon companies that have not maintained a permanent establishment in the state’s jurisdiction and thus essentially extend the state’s sovereign authority to induce forcible double taxation. Given that the MFN and national treatment principles govern discriminatory trade measures applied at the border or in the territory of an importing state, the digital services must also be shown to be traded in the territory of the state.

This issue can be resolved once the territorial presence of the digital companies is established via permanent establishment or significant economic presence. The latter concept in its present form recognises the innovation that has affected the manner in which trade of goods and services takes place in the digital age i.e. through download of data or software; and solicitation of business activities and engagement with users. The internet is not just a means of trading goods and services but also a space for companies to open a virtual shop where domestic users can access goods and services. In the Mexico – Telecoms dispute, the WTO panel observed that the territorial presence of the service supplier is not a relevant factor in cross-border supply of services, as there is no explicit mention of the same. If this plain reading is relied upon, DSTs cannot be considered extraterritorial.

The scheme of the GATS, as per prevailing jurisprudence, is technologically neutral. In the US -Gambling dispute, the WTO panel dealt with the issue of online gambling and betting. The panel extended the same protection as per the specific commitments made for the traditional ‘betting and gambling’ service to its online counterpart as the latter was only a means of supplying the same service and not a new service of its own. However, digital services are no longer this simplistic and the internet platform is a monetised service of its own. This has been recognised by the French Report which states that the real value of the digital service is created due to the ‘software and business model’ of the service.

Often, the digital service can itself be splintered from the goods and services being traded on its platform. For example, Uber and its aggregating service can be splintered from the transportation service it facilitates to provide. Creation of an equalisation levy or DST implicitly recognises the distinct value of such digital services by treating them differently from a traditional taxi service that operates via print advertising. It is contradictory for the USTR to claim discrimination between traditional advertising methods used by French companies and digital advertising used by US companies on the ground of technological neutrality. The GATS and the prevailing services classification have to be significantly overhauled in order to take cognisance of these digital developments.

Another hybrid issue of extraterritoriality and technological innovation is the value that a state’s users contribute to digital companies. Users contribute value not only in the form of profits and content but also in the form of data, which is further monetised and used for targeted advertising. According to the French Report, users who make use of the ‘free’ service provide their data as a form of payment for the service. The GATS refrains from entering into important discussions regarding a user’s right to privacy and transparency. Further, it does not make any comment about the requirement of a consideration payable for a supply of service i.e. free supply of service into a state will be subject to the same laws, regulations, and tax measures as any other service.

It is unique to digital services and their ‘software and business model’ that the service continues even after the free transaction is over. A user may browse Amazon and decide not to buy something, but has contributed value with their data, continuous advertising, and a possible sale in the future. However, in the traditional brick-and-mortar model, a user could enter a store and not buy anything without having to give their data or look at advertisements. It is only reasonable for a state to evolve its tax and privacy measures to keep up with this unique innovation in trade in services, goods, and advertising.

MFN Action under GATS

If the equalisation levy is challenged under article II of the GATS, three things have to be established. Firstly, that the measure applies to ‘like’ service suppliers; secondly, that the discrimination is based on origin of the service and service supplier; and thirdly, that the measure accords less favourable treatment to US companies.

Likeness between service suppliers may depend on the similarity of services provided by them. However, according to China – Electronic Payment Services, likeness in services creates a rebuttable presumption of likeness in the suppliers of such services, which has to be gauged on case-to-case basis. In Argentina – Financial Services, the appellate body stressed upon the competitive relationship between the service suppliers through a holistic analysis of criteria such as properties, nature, and quality of products; end-use; consumer preferences; classification of services; and mode of supply of services. Therefore, Spotify and Apple Music can be called like service suppliers of music streaming services along with Alibaba and Amazon who can be called like e-commerce portals. However, it must be noted that the definition of ‘e-commerce operators’ is broader than that of ‘digital interface services’ under the French DST. It includes not only e-commerce platforms but also electronic facilities which own the inventory of goods and services they sell online. Clothing companies like H&M or Zara that sell their own branded clothes via their online website will be charged the same levy as Amazon. The latter may not have a likeness relationship with the former.

The equalisation levy is explicitly origin-based in its discrimination as it particularly targets non-residents. Therefore, another argument against it would be on the ground of disguised discrimination against digital companies belonging to USA. The French Report concluded that the French revenue thresholds were designed to “ring-fence” digital companies from the USA. It further stated that the DST placed an unreasonable tax burden on the companies, which is unfavourable for their competitive standing in the market. As discussed above, the Indian equalisation levy extends to a larger crop of companies and the tax burden has been equally applied on all states. A levy of 2% on the revenue of US digital giants will not have a detrimental effect on the competitive standing of these players as they are already enormous monopolies in their respective markets. Further, article XIV(a) of the GATS is a general exception clause that allows inconsistent measures necessary for protection of public morals and maintenance of public order. US – Gambling accords self-determining powers to states to decide upon their public morals which can even include fiscal policy compliance.


India should use the equalisation levy on a temporary basis as it creates an unreasonable burden on digital companies having low revenue generation. Digital services trade and its taxation is a complex issue that requires collective deliberation and cooperative evolution of multilateral instruments. Unilateral measures harm the principles of transparency and certainty of rules in the trading system. Multilateral forums like the OECD and the UN have to be resurrected to deal with these pressing problems.


– Ayushi Singh

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