India-US Trade Deal Signals Shift in Digital Tax Regime, Boosts Cross-Border Digital Trade

• The US has claimed that India will remove its digital services tax (DST) as part of the recently concluded India-US trade deal.
• This claim follows the agreement under which the US agreed to reduce tariffs on Indian goods from 25% to 18%.
• A White House fact sheet stated that India would remove digital services taxes and negotiate bilateral digital trade rules to address barriers such as customs duties on electronic transmissions.
• India’s official statement on the trade deal does not explicitly mention the removal of any digital services tax, though it has spoken about reducing barriers to digital trade.
• India has already abolished its equalisation levies, which were a key concern raised by the US Trade Representative (USTR).
• A digital services tax is imposed on foreign companies earning revenue from users in a country without having a physical presence there.
• Global technology companies such as Google, Meta and Amazon are commonly affected by these taxes.
• India introduced the Equalisation Levy through the Finance Act, 2016, to tax digital transactions involving non-resident companies.
• Initially, the levy applied only to online advertising services provided by foreign firms to Indian businesses.
• In April 2020, it was expanded to cover ecommerce supply of goods and services facilitated by non-resident digital platforms.
• Under this framework, online advertising services were taxed at 6% on payments made to foreign companies.
• Ecommerce supply and services attracted a 2% tax on the value of goods or services sold or facilitated online.
• The US objected to India’s digital tax, stating in a 2021 USTR report that it discriminated against US companies by exempting Indian firms.
• The USTR estimated the levy could cost US companies over $30 million annually. India dismantled the equalisation levy in phases. The 2% tax on ecommerce supply ended on August 1, 2024. The 6% levy on online advertising was scrapped from April 1, 2025.
• With these changes, India has fully removed its standalone digital services tax regime.
• US technology companies such as Google, Meta and Amazon are major beneficiaries of the levy’s removal.
•  These firms together account for around 65% of India’s digital advertising market, valued at about $5.82 billion.
• Under the GST regime, online information and database access or retrieval (OIDAR) services are taxed at 18%.
• This applies to services such as streaming platforms, cloud services, software subscriptions, online gaming and digital advertising.
• Platforms including Netflix, Amazon Prime Video, Adobe Creative Cloud and Microsoft
  365 fall under this GST framework.