India and the United States have recently formed an agreement to facilitate a transitional approach to an equalisation levy or digital tax on e-commerce supplies starting from the 1st of April, 2022. This latest development is a key point following an assertion in January 2021 by the Office of the United States Trade Representative (USTR) that Digital services taxes accepted by India, Italy, and Turkey discriminate against US organizations.
Background of the Agreement
On 8th October 2021, a total of 136 countries, India included, concurred to enforce a minimum corporate tax rate of 15%. This initiative also entails establishing a fair system of taxing profits of large corporations within the markets where they accumulate their earnings. Conforming to this deal requires nations to withdraw all digital services tax and other comparable one-sided measures. Following this, the US, Austria, France, Italy, Spain, and the United Kingdom agreed on a transitional method to existing unilateral measures whilst implementing Pillar one of the Global Tax Deal.
Global Tax Deal Explained
This Global Tax Deal has been custom-made to address the low effective rates of tax paid by some of the most formidable corporations globally, including Big Tech companies such as Apple, Alphabet, and Facebook. The global minimum tax rate is designed to apply to the foreign profits of multinational firms that yield USD 868 million in sales worldwide.
Breaking Down Pillar 1 and Pillar 2
Pillar 1, which addresses minimum tax and subject to tax rules, allows governments to set local corporate tax rates. However, if companies pay lower rates in a specific country, their home countries could “top up” their taxes to meet the 15% minimum, thus eliminating any advantage of profit shifting. Pillar 2, on the other hand, aims at the reallocation of an additional share of profit to the market jurisdictions. It permits countries where revenues are earned to tax 25% of the largest multinationals’ so-called excess profit – defined as profit in excess of 10% of revenue.
Details of the India-US Deal
Both India and the US have agreed that the same terms applied between the US, Austria, France, Italy, Spain, and the United Kingdom would be applicable between the US and India concerning India’s charge of 2% equalisation levy on e-commerce supplies of services and the US’ trade action regarding the Equalisation Levy.
Significance of the India-US Deal
This agreement proves beneficial to India as it enables the continued imposition of the present 2% levy until Pillar One takes into effect. The deal also features a commitment from the US to terminate proposed trade actions and refrain from imposing further actions. With these measures in place, tax loss due to online transactions can be avoided as India has to retract the Equalisation Levy (EL) 2.0 after implementing Pillar 1.
Digital Services Taxes (DSTs) Overview
Digital Service Taxes (DSTs) are adopted taxes on revenues that certain companies generate from providing certain digital services. Some of these companies include digital multinationals like Google, Amazon, and Apple. The OECD is currently hosting negotiations with over 130 countries aiming to adapt the international tax system, including addressing the tax challenges of the digitalization of the economy.
India’s Tax on Digital Companies
The Indian government had introduced an amendment in the Finance Bill 2020-21, imposing a 2% Digital Service Tax (DST) on trade and services by non-resident e-commerce operators with a turnover of over Rs. 2 crore. This effectively expanded the scope of the equalisation levy that, until 2020, only applied to digital advertising services. The new levy came into effect from 1st April 2020, and e-commerce operators are required to pay the tax at the end of each quarter.