India to Commit Zero Tax on Digital Services in Trade Pact

Syllabus: GS3/ Economy

Context

• India has committed to zero tax on digital services and to refrain from imposing customs duties on digital transmissions under the India–US trade pact.

What Are Digital Services and Digital Transmissions?

• Digital services include Software-as-a-Service (SaaS) platforms such as Canva and Salesforce, online gaming, e-books, streaming services, automated digital advertising, and cloud-based solutions.
• Digital transmissions refer to the cross-border movement of data, including emails, software downloads, cloud services, AI model access, and other electronically delivered content.

Evolution of India’s Digital Tax Regime

• Introduced through the Finance Act, 2016, the Equalisation Levy (EL) sought to address tax challenges arising from the digital economy.
  • Global tech giants were generating substantial revenue in India without having a “permanent establishment” under traditional tax rules.
• The levy aimed to equalise taxation between domestic firms and foreign digital platforms.
• India’s Digital Services Tax (DST): India earlier imposed
  • A 6% Equalisation Levy on online advertising payments to non-resident firms.
  • A 2% levy on overseas e-commerce operators and streaming platforms.
• These taxes were removed in 2025. Under the new trade commitment, India would not be able to reintroduce such taxes specifically for US companies.

What are the concerns?

• Comparative Perspective: The US has secured similar commitments from countries like Bangladesh, Malaysia, and Indonesia.
  • The European Union, however, continues to regulate digital platforms through instruments like the Digital Services Act (DSA) and Digital Markets Act (DMA).
• AI and Value Capture: AI systems are increasingly embedded across agriculture, MSMEs, finance, and services.
  • There are concerns that foreign AI providers could capture a substantial share of economic value, leading to long-term technological dependence.
• Loss of Policy Space: Binding commitments under trade agreements may restrict India’s ability to tax digital and AI-driven economic activities in the future.
  • As economic activity increasingly shifts online, digital tax revenues may become a significant fiscal resource.
• Impact on Domestic Digital Ecosystem: Indian digital startups and AI developers could face competition from dominant US tech firms without fiscal protection or regulatory leverage.

Way Ahead

• India should align its digital tax architecture with the evolving OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) to ensure legitimacy and avoid retaliatory trade measures.
• A robust data protection and cross-border data transfer framework should balance openness with national security and economic interests.
• Any bilateral digital commitments should incorporate review mechanisms to assess technological, fiscal, and competitive impacts over time.

Source: FE