The US government has initiated a probe against India and 9 other trading partners for an 'unfair' and 'discriminatory' digital service tax negatively affecting US Commerce. In a statement issued by the US government, United States Trade Representative Robert Lighthizer said that President Trump was concerned about the unfair treatment meted out to US companies.

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"We are prepared to take all appropriate action to defend our business and workers against any such discrimination", he said. The USTR has initiated a probe under Section 301 of the 1974 Trade Act, which may entail action in the form of reciprocal tariffs on countries under investigation.

The US Trade Representative's office has initiated an investigation with regard to Digital Services Taxes adopted or being considered by India, Austria, Brazil, Czech Republic, EU, Indonesia, Italy, Spain, Turkey and the UK.

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USTR probe not a punitive action; will engage with US on equalisation levy: Indian officials

The USTR has sought public comments to its notice till the 15th of July. "Section 301 of the 1974 trade act gives the USTR broad authority to investigate and respond to a foreign country's action which may be unfair or discriminatory and negatively affect US Commerce", said the notice

The US in particular is objecting to India's recent decision to impose a 2% digital sales tax on non-resident companies involved in online sales of goods and services to Indian customers. According to the USTR notice, the tax only applies to companies with annual revenues in excess of Rupees 20 million.

The USTR notification said that according to available evidence, digital services taxes are expected to target large US-based tech companies.

Speaking to CNBC-TV18, top Indian government sources said this should not be seen as a punitive action against India alone. "USTR Section 301 probe is merely the first step and also covers large US trading partners like the EU and UK. India will have the opportunity to defend its policy", said a senior official. Even if USTR determines that the Indian levy is unfair, India will have the opportunity to negotiate with the US and prevent the imposition of tariffs, said a source requesting anonymity.

Ritesh Kumar, executive director, Induslaw, said, "Something of this kind was expected after the recent press reports. But, it is important to note that India is not alone in adopting unilateral measures to tax the digital economy, pending multinational consensus. India has been participating in the discussions to arrive at a consensus."

"However, what could be causing pain, is possibly more than the far-reaching implications it has, are the unusual speed and the style in which the law was enacted. The enacted provisions create several doubts on its scope of applicability and did not provide businesses a reasonable opportunity to understand and prepare. There could be questions raised on its constitutional validity, unilateral treaty override, etc," Kumar added.

First Published:Jun 3, 2020 10:10 AM IST