India gains with a digital services tax

New Delhi’s outreach to end a WTO agreement on duty-free trade in digital services would appear to be self-damaging. India is a major beneficiary of growth in services trade, and within that, the rise of digital trade, which has been allowed free access through a quarter century of tax moratorium. Tax forgone on import of services such as ecommerce, entertainment and software would be a fraction of the volume of India’s technology-enabled services exports that could face tariffs in retaliation. The point, however, is countries that are disadvantaged due to higher duties on manufacturing, say, microchips are unlikely to gain advantage in services like cloud computing.

The moratorium has served its purpose of keeping trade in digital services free without extensive rules over fair play. These rules are unlikely to be codified as long as the tax waiver remains in place. New Delhi has a strong case at Abu Dhabi 13th Ministerial Conference in seeking to sort digital services on a merit scale. Should games receive the same tax treatment as biomedical research? Both activities are increasingly being conducted online. A catch-all approach cannot be perpetuated. The question is: when do you insist on rules for digital trade?

India’s timing is right. Cross-border data flows are approaching almost half the value of global merchandise trade, which has an elaborate rulebook. There is some weight to the argument that small enterprises may lose productivity in a fragmented digital trade environment, but it actually strengthens the case for preferential treatment. Expectations from the WTO powwow in Abu Dhabi will, of course, be tempered by the scale of India’s ambition on digital trade rules. It would have made some headway by flagging the need for a terminal date for the duty moratorium to place the trade in digital services on a firmer footing. Trade does not benefit if duty waivers open up the digital divide.