Why in news?
In international trade discussions, the United States threatened additional tariffs on countries imposing digital services taxes (DSTs) on American technology firms, claiming such taxes are discriminatory. This has renewed debates over how to tax global digital companies fairly.
What are digital services taxes?
DSTs are taxes levied on the gross revenues of specific digital services such as online advertising, digital marketplaces, intermediation platforms and the sale of user data. They are not corporate income taxes but are based on revenues generated from users in the taxing country, regardless of where the company is headquartered.
Key features
- Destination‑based: Tax liability is linked to the user’s location rather than the firm’s headquarters.
- Revenue thresholds: DSTs usually target large companies that exceed both global and domestic revenue thresholds (for example, global revenues over €750 million plus a domestic threshold).
- Rates: Typical tax rates range from 2 percent to 7.5 percent of revenue from in‑scope services.
- Controversy: Because most large digital platforms are American, the United States views DSTs as unfairly targeting its companies.
India’s experience
- Equalisation levy: In 2016 India introduced a 6 percent levy on online advertising services provided by non‑resident companies. In 2020 this was expanded to a 2 percent levy on e‑commerce supplies and services by foreign digital firms.
- Policy shift: India withdrew the 2 percent levy in August 2024 and the 6 percent levy from April 2025 through the Finance Act 2025. The withdrawals align India’s tax policy with the Organisation for Economic Co‑operation and Development’s global tax framework, which seeks a consensus‑based approach.
Conclusion: DSTs reflect the challenge of taxing digital businesses that operate across borders. International cooperation under the OECD framework aims to replace unilateral taxes with a harmonised solution that balances fairness and efficiency.