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Barrier created by the foreign ownership norms (Relevant for GS Prelims and GS Mains Paper III)

USTR report lists trade irritants for investors in e-commerce, banking in 63 nations, including India.
Indian regulations on foreign ownership in e-commerce, banks, insurance and other online-related services were major barriers for overseas investors, according to a report by the U.S. President Donald Trump’s administration.

The findings were part of the report on foreign trade barriers from the Office of the United States Trade Representative (USTR). The annual report points to a list of trade irritants in 63 nations.

Position in India
1. India allows for 100% foreign direct investment in business-to-business (B2B) electronic commerce, but largely prohibits foreign investment in business-to-consumer (B2C) electronic commerce transactions.

2. Foreign direct investment is allowed in a market-based electronic retailing model, but not in the inventory-based model.

3. According to the report, the only exception that was granted was to single-brand retailers. Single-brand retailers who meet certain conditions including the operation of physical stores in India may undertake to trade through electronic commerce. This narrow exception limits the ability of the majority of potential B2C electronic commerce foreign investors to access the Indian market.

4. The trade barriers report also pointed out India’s tax (6% equalisation levy) on foreign online advertising platforms was not par with the international norms and warned the levy in its current form may impede foreign trade and increase the risk of retaliation from other countries where Indian companies are doing business.

India recently began assessing an ‘equalisation levy’, which is an additional 6% withholding tax on foreign online advertising platforms, with the ostensible goal of “equalising the playing field” between resident service providers and non-resident service providers.

However, its provisions do not provide credit for tax paid in other countries for the service provided in India.

The report also pointed out that the levy would result in taxes on business income even when a foreign resident does not have a permanent establishment in India or when underlying activities are not carried out in India.

Problems with the current structure of the equalisation

The current structure of the equalisation levy represents a shift from internationally accepted principles, which provide that digital taxation mechanisms should be developed on a multilateral basis in order to prevent double taxation.

5. According to the USTR, the Indian requirements of storage of data within India reduce productivity, dampen domestic investment and undermine the ability of information and communications technology companies to offer cutting-edge services.

6. Even though the FDI limit in insurance has been increased to 49%, the regulatory requirement for the appointment of directors and other operational requirements are a concern.

Foreign investors have expressed concern that the new requirements create a rigid structure that ignores operational realities and will dilute the rights of foreign investors in Indian insurance companies, making additional FDI in the sector unattractive.

About the United States Trade Representative (USTR):     
The Office of the United States Trade Representative (USTR) is the United States government agency responsible for developing and recommending United States trade policy to the president of the United States, conducting trade negotiations at bilateral and multilateral levels, and coordinating trade policy within the government.



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