U.S. Section 301 Probe On India’s Equalisation Levy Is Ill-Conceived And Ill-Timed

The initiation of a Section 301 investigation by the United States on June 2, 2020, against ten countries including India, targeting their levy of a Digital Services Tax, raises some critical issues in the context of global trade.

The global economic upheaval caused by the U.S.-China Trade War is proof of the devastating impact that Section 301 actions can have on global trade. The U.S. is now pointing the Section 301 gun beyond China, to an ever-increasing number of nations. The trade war between the U.S. and China is at risk of escalating into a global trade war.

Current Section 301 Initiation

The current Section 301 investigation has been initiated on the basis that the actions, policies, and practices of the nations who have levied a DST are “unreasonable or discriminatory and burdens or restricts U.S. commerce.” The term ”unreasonable” used here extends to any action, policy, or practice, which is considered “unfair and inequitable” by the U.S., even if, it is not in violation of or inconsistent with the international legal rights of the U.S.

If the ingredients of Section 301 are satisfied in this case, the U.S. Trade Representative could initiate actions, as it has done against China and others, such as:

1. The Imposition of higher duties on imports;
2. Denial of duty-free treatments or benefits under any trade agreement; and
3. Entering into an agreement with the relevant foreign country to eliminate the impugned action or to provide the U.S. with compensatory trade benefits.

Section 301 Proceedings And Compatibility With WTO Provisions

A key question is whether a Section 301 action is compatible with the provisions of the World Trade Organization.

Under the WTO Dispute Settlement Mechanism, Article 23 of the Dispute Settlement Understanding specifically precludes any member nation from:

1. Making a unilateral determination of an alleged breach of any WTO provisions, by any other member nation; or
2. Taking related corrective or compensatory actions.

Challenges have come up under the WDSM, as to the legality of Section 301 related actions. In a Panel Ruling on this issue, in the case of United States – Section 301 – 310 of the Trade Act of 1974 (WT/ DS152/R) dated Dec. 22, 1999, a view was taken that the Section 301 proceedings were “not inconsistent” with WDSM, in view of

(i) the various undertakings given by the U.S. at the time of the Uruguay Round of Agreement, and

(ii) the statements made by the U.S. before the panel that it would administer Section 301 in conformity with its WTO obligations.

The panel observed that if there were any variations in America’s conduct vis a vis its undertakings or statements, the panel would re-examine the issue.

China has recently challenged Section 301 U.S. actions at the WTO, this challenge is currently pending for consideration before the WDSM.

Section 301 proceedings were initiated against France in July 2019 in respect of its imposition of a digital services tax. The USTR found the French levy was actionable under section 301.

Digital Tax

The appropriate basis of taxing the income of multinational corporations providing a digital platform or services has been a universal concern. The fact that such companies are typically incorporated in jurisdictions of low or no tax, while sourcing income from transactions all over the world has been criticised as being inequitable.

The Organisation for Economic Co-operation and Development has worked ceaselessly over the last few years with its member countries to create a universal and consensual basis for a digital tax. The U.S. initially participated in these efforts but withdrew active participation on Dec. 3, 2019.

After America’s withdrawal, various nations independently introduced a digital tax—under different names—as it seemed impossible to achieve consensus on this tax, under the multilateral process.

India’s Defence

As India makes its submissions in the current Section 301 proceedings in respect of its DST, the Equalisation Levy, India may consider taking the following points in defense:

• The imposition of the tax is in the exercise of India’s sovereign powers. India has imposed a tax on a consideration of its economic, social, and legal concerns.

• There has been a universal effort to tax the digital economy, by appropriating some part of the taxing jurisdiction to the source countries from where the incomes and profits are generated. An overwhelming majority of nations and international bodies believe that the introduction of a digital tax is necessary, opportune, and fair.

• Even before the introduction of the tax, India has exercised taxing jurisdiction based on either a residence or source principle, as appropriate. Therefore, this is not the first time that India is seeking to tax based on a source principle. This basis of taxation is fully supported by strongly-entrenched international taxation principles.

• The tax, as imposed, has a clear “India nexus” as the transaction sought to be taxed is a transaction undertaken in India, with the transacting counterparty based in India at the point of time of the transaction.

• The various MNCs, whose cause the U.S. is espousing, in relation to the levy of the tax, are companies, who for tax purposes, are residents of a country other than the U.S. America, therefore, lacks the jurisdictional standing to initiate a Section 301 proceeding qua a tax levy, which impacts the tax residents of countries other than the U.S.

Impact Of U.S. Actions

If USTR rejects India’s submissions, India would have the ability to initiate proceedings under the WDSM.

If USTR decides to take consequential action, the export of India’s goods and services most likely to be impacted are (i) precious metals (stones, diamond) and jewellery, (ii) pharmaceuticals, (iii) engineering exports, (iv) spices, (v) computer and information services, (vi) outsourcing services, and (vii) telecommunication services.

Bilateral negotiations can be undertaken to persuade the U.S. not to take any such actions. It is to be hoped that the much-highlighted Modi-Trump chemistry will come into play to ensure that no retaliatory actions are taken against India.

Conclusion

India has a strongly defensible position in the Section 301 proceedings. However, the ever-escalating Section 301 actions are a matter of grave risk for India and the entire global trading community.

The collective persuasion of political and economic leaders globally is required to convince the U.S. to hold its hand on Section 301 actions. This would prevent global trade, which is currently a consensual regime, descending into a retaliatory gunfight. With the destructive impact of Covid-19, the world does not need another catalyst to foster an even deeper crisis in global trade.

Rohan Shah is Counsel, Supreme Court of India and Bombay High Court.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.