India, U.S. agree on transitional approach for digital tax on e-commerce supplies

India and the United States have agreed for a transitional approach on equalisation levy or digital tax on e-commerce supplies beginning April 1, the Finance Ministry said on Wednesday.

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.

However, the deal requires countries to remove all digital services tax and other similar unilateral measures and to commit not to introduce such measures in the future.

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 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 …. shall apply between the United States and India with respect to India’s charge of 2% equalisation levy on e-commerce supply of services and the United States’ trade action regarding the said Equalisation Levy.

“However, the interim period that will be applicable will be from April 1, 2022, till implementation of Pillar One or March 31, 2024, whichever is earlier,” the ministry said in a statement.

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, it added.

The final terms of the agreement shall be finalised by February 1, 2022, the ministry added.

Nangia Andersen India Chairman Rakesh Nangia said to the extent that taxes that accrue to India with respect to Equalisation Levy starting April 1, 2022, till March 31, 2024, or when Pillar One takes effect, whichever is earlier, exceed 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 is a commendable move of the Indian government. This agreement shall ensure that the corporates will get to pay fair taxes starting 2022, irrespective of the actual implementation of Pillar One, Nangia added.

AKM Global Tax Partner Amit Maheshwari said the 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,” Mr. Maheshwari said.