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Concerns About India US Digital Trade


During Prime Minister U.S. state visit, cooperation on technology emerged as a prominent talking point and yielded some of the most substantive outcomes. However, digital trade is also the area where some of the biggest U.S. tech companies have recently flagged multiple policy hurdles, including “India’s patently protectionist posture”.


GS II: International Relations

Dimensions of the Article:

  1. Current Status of India-U.S. Technology Trade
  2. Taxation Measures of Concern Raised by CCIA
  3. Concerns about India’s IT Rules 2021
  4. Criticisms of the new draft of the data protection law
  5. Data Localisation
  6. Firms’ views on the draft Telecom bill
  7. Other policy barriers to digital trade with India

Current Status of India-U.S. Technology Trade:

Trade Overview:
  • In FY2023, the U.S. became India’s largest overall trading partner, with bilateral trade increasing by 7.65% to $128.55 billion in 2022-23.
  • However, digital or technology services have not been a major component of bilateral trade.
  • According to a report by the CCIA, the U.S. had a $27 billion trade deficit in digital services with India in 2020.
Tech Partnership Initiatives:
  • The Initiative on Critical and Emerging Technology (iCET) was announced by President Joe Biden and Prime Minister Narendra Modi to enhance tech collaboration.
  • The iCET focuses on areas such as artificial intelligence, quantum computing, semiconductors, and wireless telecommunication.
  • The Strategic Trade Dialogue, established under the iCET, aims to address regulatory barriers and align export controls for smoother trade and deeper cooperation.
Semiconductor and Telecommunications Collaboration:
  • An MoU on Semiconductor Supply Chain and Innovation Partnership was signed with a combined investment valued at $2.75 billion.
  • Two Joint Task Forces were launched to focus on Open RAN network and research in 5G/6G technologies.
  • Both countries have shown enthusiasm for future technologies like AI and Quantum Computing, establishing the Quantum Coordination Mechanism and a joint fund for AI commercialization.

Concerns of U.S. Tech Firms:

Imbalance and Misalignment in Economic Relationship:
  • The CCIA has highlighted a “significant imbalance” and “misalignment” in the U.S.-India economic relationship.
  • While the U.S. has extended market access and openness to Indian companies, the same reciprocity has not been observed from the Indian side.
  • The CCIA notes that the Indian government has implemented protectionist industrial policies, favoring domestic players over U.S. digital service providers, thus tilting the playing field.
Discriminatory Regulation and Policies:
  • The CCIA points out discriminatory regulations and policies in India, citing the example of guidelines on sharing geospatial data that provide preferential treatment to Indian companies.
  • U.S. tech firms express discontent over India’s deviation from democratic norms and values, and the increasing government control over political speech.
  • These factors make it challenging for U.S. companies to operate in India and hinder their ability to thrive in the market.
Concerns about India’s Democratic Values:
  • During Prime Minister Narendra Modi’s state visit, concerns were raised about India’s democratic values compared to those shared by the U.S., which are considered fundamental to the bilateral partnership.

Taxation Measures of Concern Raised by CCIA:

Expanded Equalisation Levy:
  • U.S. tech firms have raised concerns about the expanded version of the “equalisation levy” imposed by India on digital services.
  • The original equalisation levy was introduced in 2016 to “equalize the playing field” between resident and non-resident service providers of digital services.
  • In 2020, the Indian government introduced “Equalisation Levy 2.0,” which imposes a 2% tax on gross revenues received by non-resident e-commerce operators from providing e-commerce supplies or services to Indian residents or non-resident companies with a permanent establishment in India.
Double Taxation and Complicated Framework:
  • The introduction of the equalisation levy in 2016 resulted in double taxation and added complexity to the taxation framework.
  • Constitutional validity and compliance with international obligations were also questioned.
  • Sweeping and Vague Scope:
  • The 2020 amendment to the equalisation levy made its scope sweeping and vague, creating uncertainties in its application.
Unilateral Implementation:
  • The CCIA argues that the Indian government implemented the levies unilaterally, while 135 other countries were awaiting clarity on an Organisation for Economic Cooperation and Development (OECD) agreement to reform the global tax system.
  • The OECD agreement aims to remove digital services taxes and similar measures and commit countries to refrain from introducing such measures in the future.

Concerns about India’s IT Rules 2021:

Compliance Burden:

  • The IT Rules 2021 place a compliance burden on social media intermediaries (SMIs) and platforms with five million or more registered users, affecting several U.S. firms.

Impractical Compliance Deadlines and Content Take-Down:

  • The rules require intermediaries to take down content within 24 hours upon receiving a government or court order, which is seen as impractical in some cases.
  • The platforms are also required to appoint a local compliance officer.

Removal of Prohibited Content:

  • SMIs are obligated to remove information or communication links within 72 hours in relation to six prohibited categories of content, based on user complaints.
  • Critics argue that this may lead to censorship and limit freedom of expression.

Grievance Appellate Committees (GAC):

  • The establishment of three-member GACs has drawn criticism. These committees have the power to hear user complaints regarding content-related issues and can reverse the decisions made by SMIs.

Additional Compliance Requirements:

  • The Ministry of Electronics and IT (MeitY) added another layer of compliance by requiring platforms to make reasonable efforts to prevent the publication of content fact-checked as fake or false by the Press Information Bureau (PIB).

Criticisms of the new draft of the data protection law can be summarized as follows:

Ambiguities in Cross-Border Data Flows and Compliance Timelines:

  • The draft lacks clear guidelines on how cross-border data flows will be regulated.
  • Compliance timelines for implementing data protection measures are not specified, creating uncertainty for businesses.

Concerns about Data Localisation:

  • The previous version of the law imposed data localisation requirements, which drew criticism.
  • The new draft drops these provisions, but the absence of clear guidelines raises speculation about de facto localisation.

Impact on Operating Costs and Discrimination:

  • Data localisation requirements can significantly increase operating costs for companies, especially foreign firms.
  • Such requirements may be viewed as discriminatory, limiting the ability of foreign companies to store data outside of India.

India’s Role as a Data Hub and Global Implications:

  • India has a large number of active internet users and aims to become a hub for data processing.
  • India’s policies on cross-border data flows will have global implications, similar to the impact of the European Union’s GDPR.

Arguments for Data Localisation and Potential Drawbacks:

  • Governments have various arguments in favor of data localisation requirements.
  • However, such requirements can impose increased costs on companies and may be perceived as discriminatory against foreign firms.

Data Localisation:

  • Definition: Data localisation refers to the practice of requiring data generated within a country’s borders to be stored and processed within that country.
  • Importance: Data plays a crucial role in today’s technology-driven world, leading countries to implement data localisation mandates to keep data within their territorial boundaries.
  • Foreign Tech Companies: Companies like Meta and Amazon operating in India often prefer to store their data in other countries where they have servers, which means the data leaves Indian borders.
  • Cross-Border Data Flows: The new draft of the data protection law includes a provision stating that cross-border data flows will only be allowed to countries notified by the Indian government.
  • Concerns and Criticisms: Industry experts question the basis for country notification and the terms for data transfers, raising concerns about potential discrimination and the exclusion of certain countries. The CCIA suggests supporting cross-border data flows through certifications, standard contractual clauses, and binding corporate rules.
  • Previous Version of the Bill: The earlier version imposed data localisation requirements on data fiduciaries for specific types of personal data, drawing criticism from companies and foreign governments.
  • Grey Areas in the New Draft: Critics argue that the new draft drops provisions on data localisation, creating ambiguity and speculation about de facto localisation.

Firms’ views on the draft Telecom bill:

  • Sweeping Regulatory Ambit: The CCIA argues that the draft Telecommunications Bill, 2022, expands the definition of “telecommunication services” to include various internet-enabled services that differ significantly from traditional telephony and broadband services.
  • Inclusion of OTT Communication Services: The current draft includes Over-the-top (OTT) communication services, such as messaging platforms, within the scope of “telecommunication services.” These platforms utilize the network infrastructure of Telecom Service Providers (TSPs) to compete with voice calls and SMS services.
  • Onerous Obligations: The CCIA warns that if the law is passed as it stands, it would subject several platforms to burdensome requirements, including licensing, government access to data, encryption mandates, internet shutdowns, infrastructure seizures, and potential monetary obligations.
  • Global Authorization/Licensing Requirement: The industry body contends that the proposed law would impose a unique global authorization or licensing requirement on digital firms, which is unprecedented.

Other policy barriers to digital trade with India:

Digital Competition Act:

  • The Parliamentary Committee on Finance proposed a “Digital Competition Act” to address anti-competitive practices by big tech companies.
  • The CCIA suggests that the proposal, including estimated taxes for significant digital intermediaries, seems to primarily target U.S. tech companies.

Fines on Google:

  • The CCIA expresses dissatisfaction with the Competition Commission of India’s fines imposed on Google for alleged anti-competitive practices in its Play Store policies and dominant position in the Android mobile operating system domain.
  • The body considers this part of India’s attempt to use antitrust laws as a cover for protectionist industrial policy.

-Source: The Hindu

July 2024