Author: Rasna Singh, Himachal Pradesh National Law University

With the advent of digital services in day-to-day life, from entertainment to shopping, it has made policymakers think about the digital services taxes. In many countries, including India, taxes on digital services have been imposed (The Digital Services Tax has been repealed in India in 2024, so it was removed). With the upsurge of the Digital Services Tax (DSTs) all over the World, questions have arisen regarding their compatibility with International Trade Law. The U.S investigated several DSTs and found out that DSTs have been adopted by many countries like Austria, Italy, India, Spain, France, Turkey, and the U.K. After the investigation, the U.S also argued that DSTs are not only Discriminatory, but also violate the international tax principles. DSTs have been heavily criticised due to the contradiction between DSTs and international tax principles. This article investigates the compatibility of DSTs with international trade law, including its core agreements such as the World Trade Organization(WTO), General Agreements on Trade in Services, the Legality of the DSTs under international trade rules, and how DSTs contradict the international tax principles, and how the contradictions between the two can be avoided. 

Keywords

Digital Service Tax (DSTs), Policymaker, Discriminatory, World Trade Organization(WTO), General Agreements on Trade in Services(GATS), Compatibility. 

To Understand What Digital Services Tax (DSTs) are, we need first to understand what Digital Services are. Digital services comprise a wide range of activities, from straightforward transactions to complex procedures, and are delivered online or via electronic networks. The tax imposed on the same services is called the Digital Services Tax. The increasing shift from traditional services to digital services in the global economy has compelled governments of almost every country to consider ways to tax international technology businesses that generate considerable income without a physical presence in that country. Several jurisdictions have already established or proposed DSTs to ensure revenue flows from digital service providers that earn from their domestic users. The digital economy has grown two and a half times faster than global GDP over the past 

15 years, profoundly changing how enterprises operate in foreign markets. International tax codes haven't kept pace with their fast expansion until lately. 

However, an investigation by the U.S. has found that the DSTs contradict international trade law principles, raising many serious questions. The primary concern is whether unilateral DSTs comply with the WTO's GATT 1994/GATS framework's requirements, including those related to market access, non-discrimination (most-favoured-nation and national treatment), and the prohibition on covert protectionism. The DSTs have both pros and cons. 

 The WTO is the international organization for governing international trade among the member nations. The General Agreement on Tariffs and Trade (GATT) governs trade in goods, while the General Agreement on Trade in Services (GATS) governs trade in services.

Under GATS, WTO Members commit to certain disciplines including non-discrimination obligations, e.g., the Most-Favoured-Nation (MFN) principle and National Treatment (i.e., treating foreign services and providers no less favourably than domestic ones). 

The goal of GATS (and of the broader WTO system) is to liberalise trade, reduce barriers, and ensure equal conditions of competition. 

This Article discusses the legal compatibility of DSTs with international trade principles and explores whether such taxes may withstand challenges under rules controlling global commerce. 

Many researchers, academicians, and countries have studied DSTs and hold different perspectives on the topic. To collect revenue from online advertising, data-driven services, and other digital offerings targeted at local customers, many nations have attempted to tax foreign digital service providers through Digital Services Taxes (DSTs) as the digital economy continues to expand. 

One of the studies by Alice Pirlot and Henri Culot, published in a journal titled "When International Trade Law Meets Tax Policy: The Example of Digital Services Taxes," examined the conflict between DSTs and WTO law, as well as the challenges in the digital economy. This Article has also explained how different countries have used various approaches to combat tax evasion in their economies. This Article discusses two methods in detail—first, the Consensus-Based Approach and Second, the Unilateral Approach. Analyse how DSTs are discriminatory under GATS and how the idea of DSTs emerged. 

One of the articles by the site Bloomrang Tax, named The OECD and Digital Services Taxes, explains that the Organisation of Economic Co-Operation & Development (OECD) is trying to rectify taxation of the digital economy under the OECD/G20 Inclusive Framework, as many Multinational Enterprises (MNEs) earn revenue 

without having a physical presence there. The Article discussed the Two Pillars Solution for the challenges faced in the taxation of the digitalisation economy.

The objective of this Article is to examine the legality of the Digital Service Tax under international trade law, how taxation of the digital economy is affecting international tax rules, and how it is contradicting WTO and GATS laws. The Research methodology used for this Article is Doctrinal research. The researchers have used Primary and Secondary sources. The Primary Sources are the books: Schmitthoff's Export Trade: The Law and Practice of International Trade, International Trade Law by Indira Carr and Llb Peter Stone Ma. The Secondary Sources are Article, Blogs, Journals etc. 

The Moratorium on Electronic Transmission and E-Commerce

 In the past, WTO members agreed to a moratorium on customs duties for electronic transmissions as digital trade developed. In other words, this moratorium has exempted cross-border transmissions of digital goods (such as software, e-books, and streaming) from customs tariffs. Although customs duties (on digital goods) are the primary focus of this, it reflects a more general idea of facilitating digital trade under WTO regulations. 

DSTs are situated where trade law and tax policy converge.  While taxes are not the same as tariffs or customs duties, they may raise issues under WTO trade law, specifically the GATS non-discrimination obligations, when they impact cross-border trade and competition, particularly for foreign providers.Beyond the WTO, bilateral or plurilateral trade agreements (free trade agreements) may also be pertinent since they occasionally contain non-discrimination clauses or tax-related regulations. 

The Organisation for Economic Co-operation and Development (OECD) is an organisation that collaborates with numerous countries, policymakers, governments, and citizens worldwide on taxation in international law through the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. It addresses the challenges faced during the digitalisation of the economy with the Two-Pillar Solution. The Two Pillars are: (1) Pillar One Nexus Rule, (2) Pillar Two Global Minimum Corporate Tax. These two pillars are established only for large multinational companies. Now we will understand how these two Pillars work: 

Pillar One Nexus Rules 

Pillar One is a new global tax rule designed for really big multinational companies. It says that if such a company sells products or services to people in a country — even without having a physical office or outlet there — that country should still be able to tax a portion of the company’s profit.

The rule applies only to the largest, highly profitable firms — not to every business — so smaller firms are not affected. Once a company qualifies, part of its “extra profit” (over a certain profitability threshold) will be shared with the countries where its customers are.

Pillar One also aims to make taxes simpler and more predictable. It includes a clear set of rules that determine how profits are divided and where they are taxed, plus a system for resolving disputes. This helps avoid confusion or disagreement between countries, and gives companies and governments a stable, agreed framework.

Pillar Two Global Minimum Corporate Tax 

This Pillar establishes that, regardless of where a company is headquartered or operates, large multinational companies must pay a minimum tax of 15%.

Pillar two has two mechanisms: 

Subject to Tax Rule 

Sometimes, the multinational companies intentionally evade taxes by paying tax in a country where the tax rate is nominal. When a payment is subject to a minimal tax rate in a payee country that is lower than the minimum rate within the system, the Subject to Tax Rule (STTR) applies.  

This rule specifies that MNEs will calculate their additional "top-up tax" liability by applying a specific method first to determine their ETR and then the top-up tax. The Global Anti-Base Erosion (GloBE) Rules establish a global minimum tax on certain multinational enterprises that are liable to tax on their income, ensuring a minimum effective tax rate (ETR) of at least 15%. 

The OECD is trying to implement this rule, but they are facing a lot of problems in doing so. Not all members agree to the two-pillar solution yet. Only 140 members have joined this framework so far. 

The global economy's digitalisation brings on indirect tax issues, and some nations have extended the value-added tax (VAT) to digital sales. However, DSTs differ from income taxes and internet sales taxes, and they are not VAT. The OECD has issued guidance on how to collect VAT on cross-border sales, beginning with the International VAT Guidelines, released in 2015 and amended in 2017. For the handling of international trade in services and intangibles, these rules provide nonbinding international norms. Their purpose is to simplify the administration of the VAT regime, provide tax certainty for conforming enterprises, and eliminate double taxation and potential for VAT fraud. 

The OECD advises foreign business-to-consumer (B2C) service providers to register and account for VAT in the country where the customer is located, typically through a simplified registration process. 

There is also a notion that existing international trade frameworks (GATS, WTO regulations) were not designed with the digital economy in mind. Hence, interpretation could change, and DSTs might pass legal scrutiny if WTO members accept a broader concept of "services" and "service-supplier." 

India levied taxes on digital services prior to 2024.  However, the Digital Services Tax was eliminated after being repealed in 2024.  India has only imposed a 2% tax on digital services since 2016.  Different nations apply DSTs in different ways.  For instance, Austria only levies a DST on digital advertising, while Poland only levies a DST on streaming services.  Multinational corporations may be subject to double taxation if one government imposes DSTs on their earnings and another government follows suit. 

Before 2024, India also imposed taxes on digital services. However, the Digital Services Tax was repealed in 2024, after which it was removed. Since 2016, India has levied only 2% tax on the same services. Different countries impose DSTs differently. For example, Poland only imposes a DST on streaming services, whereas Austria applies a DST only to digital advertising. If one government levies DSTs on a company's earnings and then another government does the same, multinational corporations may be subject to double taxation. 

The OECD/G20 Inclusive Framework has suggested a Consensus-Based Approach to harmonise international taxation and reduce the risk of trade disputes and double taxation. This solution, comprising the Two-Pillar Solution, addresses the challenges of digitalisation. While Pillar Two imposes a Global Minimum Corporate Tax of at least 15% on large multinational corporations, Pillar One deals with the distribution of taxing rights (Nexus Rules). Ultimately, the future of taxing the digital economy depends on the ability of the international community to achieve consensus on and implement this multilateral solution, as only 140 members have joined the framework so far. 

Critics claim that the Digital Services Tax (DST), which may violate the non-discrimination (National Treatment and MFN) regulations under the World Trade Organisation (WTO) and General Agreement on Trade in Services (GATS), frequently disproportionately affects large foreign tech companies, particularly those based in the United States. 

DSTs can act as an indirect barrier to cross-border digital services by increasing costs for foreign providers, potentially restricting trade and distorting competition. 

Even though DSTs are "direct taxes," GATS was not created with contemporary digital-economy taxes in mind, so it is unclear if such taxes are permitted under its exceptions. 

Because many DSTs are imposed unilaterally (without multilateral agreement), they increase the risk of trade disputes and retaliation, undermining global trade cooperation. 

A tax should be imposed on digital services, but there should be proper classification of MNEs to prevent minor or moderate MNEs from suffering due to the tax. 

Additionally, the tax imposed should be uniform across all categories, thereby protecting small MNEs. It should be noted which country has implemented DSTs and is properly functioning, so that ideas can be taken from that country. After which, with the help of that, the DSTs can be applied. 

As the rules of WTO are fixed, DST's rules can be framed in such a way that they do not violate or contradict the rules of WTO. The policymaker can take care of that. 

1. Alice Pirlot & Henri Culot, When International Trade Law Meets Tax Policy: The Example of Digital Services Taxes, 55 J. World Trade 895 (2021) (Last Visited 3 December, 2026),  https://ora.ox.ac.uk/objects/uuid:647c9873-4b09-4f2f-906b-6680726a6051/files/rgx41mj28v 

2. P. Low, Digital Services Taxes, Trade and Development (Dec. 2020) (Last Visited 3 December,2026), https://iit.adelaide.edu.au/ua/media/1221/dst-paper_final_december_2020.pdf 

3. “The WTO as Tax Scarecrow?”, Tax Journal (Jan. 17, 2019) — a policy-oriented discussion raising doubts about how far WTO law should constrain national tax measures (Last Visited 3 December,2026), https://www.cambridge.org/core/books/taxing-the-digital-economy/responding-to-the-challenges/1A2902848A6C8C8FBDD0EB56CD518A89 

4. Robert Walters, The Digital Economy and International Trade: Transnational Data Flows Regulation (2021).

5. Mira Burri (ed.), Big Data and Global Trade Law (Cambridge Univ. Press 2023).