Business With Biden: The Big Indo-U.S. Tax Conundrum

India has much to gain if U.S. President Joe Biden focusses more on expanding bilateral free trade and investment, rather than go ahead with his tax proposals. But it won’t be easy. The economic climate in America has moved towards protectionism, something that even enjoys bipartisan support in the U.S. Congress. The pandemic has upended the U.S. economy, and Biden has a tightrope walk ahead.

- Sudipto Dey

THE ROW OVER THE RECENT U.S. Trade Representative (USTR) probe report that flagged India’s digital services tax, the Equalisation Levy, as being “inconsistent” with U.S. trade policies, may well test the tone of the new administration under President Joe Biden on tax issues facing Indo-U.S. businesses. U.S. lawmakers, irrespective of their political affiliations, have been known to be touchy about taxing of American digital businesses. What is also keeping many Indian and American businesses on tenterhooks are the new administration’s poll campaign proposals to raise corporate taxes and measures to discourage offshoring and encourage onshoring of U.S. goods and services. With the Democrats enjoying a majority in the Congress, the Biden administration gets more leeway to implement its tax proposals.

“It will be busy times for U.S. taxpayers and their advisors,” says Dinesh Kanabar, CEO, Dhruva Advisors, a tax advisory firm. If Biden goes ahead and implements all his poll proposals, it might mean a rollback to a regime of higher rates. Former President Donald Trump, through the Tax Cuts and Jobs Act in 2017, brought down the federal corporate tax rate from 35% to 21%, the lowest in decades. This was in line with the Republican poll promise of attracting investments into the country by making the U.S. among the lowest tax jurisdictions in the world.

Mukesh Butani, founder and managing partner, BMR Legal, points out that while ushering in the new tax regime, many Democrats had agreed with the Republicans that the 35% rate hampered the competitiveness of U.S. firms in an era in which various countries, including India, had slashed the rates of corporate tax.