India-US Digital Services Agreement Raises Sovereignty Questions
The recent trade agreement between India and the United States has sparked significant debate regarding its potential intrusion into New Delhi's sovereign policy space, particularly concerning digital taxation. A White House fact sheet released on Tuesday confirmed that India has agreed to eliminate its digital services taxes and commit to negotiating bilateral digital trade rules designed to address barriers to digital commerce.
Background of the Digital Services Tax Removal
This development carries substantial weight because India had already taken steps to remove the so-called 'Google tax' before formal trade negotiations with the United States commenced. However, during the negotiation process, Washington sought a unilateral commitment from India that would prevent the reintroduction of such taxes in the future under the trade deal framework.
As part of the 35th amendments to the Finance Bill, 2025, the Indian government proposed removing the 6% equalisation levy (EL) previously charged on digital advertisements. This followed the earlier elimination of the 2% equalisation levy on e-commerce services through the Finance Act, 2024. The equalisation levy was originally introduced by the Finance Act, 2016, as a measure to create tax parity between resident and non-resident e-commerce companies operating in the Indian market.
Legal Concerns and Unilateral Provisions
Legal advisers to the Ministry of Commerce and Industry had previously cautioned Indian negotiators against accepting Washington's proposal that would prohibit India from reintroducing equalisation levy-style taxes. These advisers noted that the provisions proposed by the United States were "unilaterally framed" because they did not require both parties to refrain from applying digital taxes on each other. Instead, the provisions sought a legal commitment exclusively from the Indian side.
This arrangement raises concerns because while the United States offers numerous digital services in India and American technology companies have consistently lobbied against such taxes, India also exports a substantial range of digital services to the United States, particularly in the information technology sector. The majority of India's total services export earnings from the American market come from these digital service exports.
Broader Implications for Trade Negotiations
Government officials have expressed apprehension that agreeing to such unilateral provisions could establish a risky precedent for future trade negotiations. Similar demands could potentially be made by other trading partners during discussions with New Delhi, thereby complicating future negotiation processes and potentially limiting India's policy flexibility.
Trade experts emphasize that digital taxation typically falls outside the framework of traditional trade agreements, as it represents a nation's sovereign right to determine its own tax policies. Many argue that India should preserve this right rather than ceding it through bilateral agreements.
International Context and US Trade Strategy
The United States has pursued similar digital trade provisions with other nations, including Indonesia, which committed to addressing barriers impacting digital trade, services, and investment. Indonesia agreed to provide certainty regarding data transfer to the United States, eliminate tariff lines on "intangible products," and support a permanent moratorium on customs duties on electronic transmissions at the World Trade Organization.
The United States Trade Representative (USTR) had previously identified India's 6% equalisation levy as a discriminatory measure against American firms in its report on non-tariff barriers. The USTR report argued that most digital services taxes are structured in ways that disproportionately affect United States companies, often targeting American firms while exempting domestic companies engaged in similar business activities.
The United States has also raised concerns about digital services taxes with numerous trade partners, particularly the European Union, and has threatened to impose additional 10% tariffs in disputes over digital services taxation. The USTR has noted that the disproportionate impact of the EU's Digital Services Act and Digital Markets Act on American firms undermines United States competitiveness due to increased compliance costs not borne by European competitors.
As digital trade becomes increasingly central to global commerce, the balance between facilitating international trade and preserving national sovereignty in taxation policy remains a critical issue for nations worldwide.
