India and the United States have agreed for a transitional approach on equalisation levy or digital tax on e-commerce supplies beginning from April 1, 2022, till pillar one takes effect or March 31st, 2024, whichever is earlier (called “interim period”).
In a major reform of the international tax system, on October 8 this year, 136 countries, including India, have agreed to an overhaul of global tax norms to ensure that multinationals pay taxes wherever they operate and at a minimum 15% rate (under pillar 2).
However, this would require countries to remove all digital services tax including India’s Equalisation levy and other similar unilateral measures adopted by other countries.
Equalisation levy in India
Finance Act, 2020 inserted a new section 165A which obliges the non-resident e-commerce operators providing e-commerce supply or services to a person resident in India, to pay equalisation levy @ 2% of the amount of consideration received or receivable by such operator from e-commerce supply or services made or provided or facilitated by it.
Where, “E-commerce Supply or services” means:
i. Online sale of goods owned by the e-commerce operator; or
ii. Online provision of services provided by the e-commerce operator; or
iii. Online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
iv. Any combination of activities listed in clause (i), (ii) or clause (iii).
After, compromise on a transitional approach between US and India, It is agreed that India will not charge Equalisation levy on above transactions once pillar 1 takes effect. However, between the interim period India shall continue to charge EL @ 2%.
The proposed two-pillar solution of the global tax deal consists of two components –
Pillar One, which is about reallocation of an additional share of profit to the market jurisdictions and
Pillar Two, consisting of minimum tax (15%) and subject to tax rules.
Following that on October 21, the United States, Austria, France, Italy, Spain and the United Kingdom reached an agreement on a transitional approach to existing unilateral measures while implementing Pillar one.
India and the United States have agreed that the same terms as mentioned in a joint statement regarding compromise on a Transitional Approach to existing unilateral measures during the Interim Period Before Pillar 1 is in Effect shall apply between the United States and India with respect to India's charge of 2 per cent equalisation levy on e-commerce supply of services besides the commitment from the US side to terminate the present proposed trade actions and not to impose any further trade action against such measures as India’s Equivalization Levy was subject to US investigation u/s 301 of US Trade Act, 1974. This was considered discriminatory and against international principles by the US. The commitment from the US to not to take further trade action while terminating the present action is a welcome move in favour of India.
However, during the interim period India and the U.S. will remain in close contact to ensure that there is a common understanding of the respective commitments and endeavour to resolve any further differences of views on this matter through constructive dialogue.
The final terms of the agreement shall be finalised by February 1, 2022, the ministry added.
Creditability of taxes paid before implementation of pillar one:
Taxes charged by India to the extent that would accrue to India with respect to Equalisation Levy during the interim period exceeds an amount equivalent to the tax due under Pillar One in the first full year of implementation (prorated to achieve proportionality with the length of the interim period), such excess will be creditable against the portion of the corporate income tax liability associated with Amount A as computed under Pillar One in these countries, respectively.
This agreement shall ensure that the corporates will get to pay fair taxes starting 2022, irrespective of the actual implementation of Pillar One.
Amit Maheshwari, our partner has been quoted in the media as well on the same,
“India-US agreement on a transitional approach is beneficial to India, as it can carry on with the present 2% levy with certainty until Pillar One takes into effect, along with a commitment from the US side to terminate the proposed trade actions and not to impose further actions as well.
Further, this would help prevent the tax loss arising due to online transactions as India has to roll back EL 2.0 any way after Pillar 1 and it is to be kept in mind that Pillar 1 only applies to companies with a global turnover above 20 billion euros, which is precisely top 100 companies,"
