Nearly a month after the biggest global tech companies sought withdrawal of the equalisation levy, or the digital tax in India, the United States of America has raised several concerns over barriers to digital trade in India.
In a report on trade barriers from the Office of the United States Trade Representative, the agency has said that India’s 6% equalisation levy may impede foreign trade and increase the risk of retaliation from other countries where Indian companies do business.
The digital tax, which is known as the equalisation levy, is a tax that the government first put in place in 2016 where it taxed global tech giants such as Facebook, Google, among others for advertising online in India.
As of April 1, this year, this was extended to cover all overseas e-commerce companies as well through an amendment to the Finance Bill, 2020, where income generated by a foreign e-commerce entity in India will now be taxed at 2%.
With this being levied on sale of both goods and services, it would cover a range of companies from Amazon to Alibaba and Netflix, among others.
According to the US, the current structure of the equalisation levy represents a shift from internationally accepted principles. These principles suggest that digital taxation mechanisms should be developed in consultation with various countries to avoid double taxation.
India is in the midst of formulating an e-commerce policy that could require all customer and transaction data to be stored locally and looks to impose restrictions on cross-border data flows. These restrictions, the US claims, show preferential treatment for India’s own domestic digital products and could potentially force transfer of intellectual property of companies.
The United States said that it strongly encourages India to reconsider this draft policy and particularly the measures described above.
Apart from these, the US also raised concerns over India’s data localisation norms, its personal data protection bill and the Information Technology (Intermediary Guidelines) Rules 2018.
Data localisation
India’s draft personal data protection bill, which was introduced in the Parliament in December 2019, proposes that all data generated in India be stored locally. The US says that these data localisation requirements would serve as significant barriers to digital trade between the United States and India.
“These requirements raise costs for service suppliers that store and process personal information outside India by forcing the construction or use of unnecessary, redundant local data centers. For smaller foreign firms that cannot afford redundant computing facilities within India, these requirements could serve as a total market access barrier,” it observed in its report.
Referring to RBI’s requirement of storing payments data locally, the US says that this raises costs for service suppliers, and disadvantages foreign firms, which are more likely to be dependent on globally distributed data storage and information security systems.
“Furthermore, an only-in India data storage requirement hampers the ability of service suppliers to detect fraud and ensure the security of their networks.”
The US also observed that the requirement under the Personal Data Protection Bill, 2019 to store a copy of all “sensitive” and “critical” personal information related to Indian persons on a server located in India would undermine the ability of foreign firms to supply many services to Indian consumers on a cross-border basis, and would not support the privacy of personal information.
Internet services
The US has raised privacy concerns over the Information Technology (Intermediary Guidelines) Rules 2018 requiring online intermediaries (such as Facebook, Google, Twitter, etc) to enable tracing the origin of an information. (For example, the source of a WhatsApp forward). This, the US believes compromises the privacy and security of data and will require services that employ encryption to break that encryption.
“If enforced, this requirement could force service suppliers to undermine the privacy and security of their services, and potentially violate contractual terms and conditions related to data privacy and access to enterprise data,” the report stated.
There is no safe framework for online intermediaries (such as Facebook, Google, Twitter, etc) from being liable for user generated content on the platform.
What this means is that any Indian can complain that certain content is “disparaging” or “harmful,” and intermediaries must respond by removing that content within 36 hours. This incentivises policing user-generated content, making it overly restrictive.
The US says that the draft Intermediary Guidelines 2018 threaten to further worsen India’s intermediary liability protections.
“These draft rules would require platforms to become proactive arbiters of “unlawful” content, shifting the onus of the state to private parties. If these draft rules come into force, they will incentivise overly restrictive approaches to policing non-IP user-generated content and will undermine many Internet-based platform services,” the US said.
FDI
The US has also said that India’s FDI norms pertaining to e-commerce limits the ability of many e-commerce companies serving the India market. It was referring to the new revised norms that require e-commerce sites to operate purely as marketplaces, and cannot promote or sell products from their own brands or from their inventory.
“The only exceptions for FDI in inventory-based electronic commerce are for food product retailing and single-brand retailers that meet certain conditions, including the operation of physical stores in India. This narrow exception limits the ability of many electronic commerce service suppliers to serve the Indian market,” it said.
U.S. goods exports to India were $34.4 billion, up 2.7 percent ($907 million) from the previous year. Corresponding U.S. imports from India were $57.7 billion, up 6.1 percent. India was the United States' 12th largest goods export market in 2019.