Introduced in 2016, Under Finance Bill

• Digital Tax refers to the tax levied on digital goods or services or digital business activities. It is a form of Direct tax.
• In 2016, India was the one of the first countries to introduce a 6 percent equalization levy i.e., Digital tax on nonresident digital companies (Google Facebook) that was restricted to online advertisement services (digital advertising taxes or “DATs”).

Why?

• DST is aimed at ensuring that non-resident, digital service providers pay their fair share of tax on revenues generated in the Indian digital market.
• Overcoming lacunas of obsolete laws.
• Due to the changing international economic order, countries such as India which provide large markets for digital corporations seek a greater right to tax incomes.
• Ensures fair competition, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations.

Issues:

• US initiated the US Trade Representative (USTR) investigations which found DST to be discriminatory, and then announced retaliatory tariffs could lead to digital tax war.
• Data security with view of amount of data that will be involved.
• Burden on customers as these could be passed on to customers.

Way Forward:

• There is need of coordination among world countries to develop guidelines and set up a dispute redressal mechanism to resolve dispute arising out of application of digital tax.
• Bilateral and multilateral renegotiation of tax treaties superseding domestic tax laws are required to address issue of double taxation.
• DST is an interim alternative outside tax treaties. It possesses the advantage of taxing incomes that currently escape tax and creates space to negotiate a final, overarching solution to this conundrum.