In an effort to maintain stability in digital business, India and the US have decided to extend a 2 per cent equalisation levy or digital tax on e-commerce supplies until June 30, the Finance Ministry said on Friday. Earlier, the validity was ending on March 31.
Experts say the US has suspended any trade retaliatory measures until June 30, 2024, or until the implementation of Pillar One of the OECD’s global tax reform initiatives, whichever occurs earlier. Further clarification on the matter should come in months to come, they said. Effective April 1, 2020, India is imposing an equalisation levy (EL) of 2 per cent on amounts received/receivable by a non-resident e-commerce operator from e-commerce supply or services. This levy captures many cross-border e-commerce transactions in the absence of any local country physical presence.
India and the US joined 134 other members of the OECD/G20 Inclusive Framework (including Austria, France, Italy, Spain, and the UK) in reaching an agreement on October 8, 2021, on the statement on a two-pillar solution to address the tax challenges arising from the digitisation of the economy. On October 21, 2021, the US and Austria, France, Italy, Spain, and the UK reached a political compromise on the transitional approach to the unilateral measures in force while Pillar 1 is implemented.
On November 24, 2021, India and the US agreed that the same terms that apply under the October 2021 Joint Statement shall apply between India and the US with respect to India’s charge of 2 per cent equalisation levy on e-commerce supply of services and the US’ trade action regarding the said Equalisation Levy. The validity of this agreement was from April 1, 2022, till implementation of Pillar 1 or March 31, 2024, whichever is earlier. Now this has been extended for one more month
Aravind Srivatsan, Tax Leader at Nangia Andersen LLP, the US accused India of stalling the two-pillar negotiations. This arrangement protects the interests of US MNEs, preventing the equalisation levy from becoming a sunk cost of doing business in countries that have imposed digital services taxes (DST).
Pillar 1 obligations
India, along with the other countries mentioned, will now, according to this agreement, have to provide credit for the collected equalisation levy against future Pillar 1 obligations. “This overall arrangement is expected to see further extensions until a final consensus emerges on Pillar 1,” he said.
Amit Maheshwari, Tax Partner, AKM Global, said that equalisation levy, prompted trade concerns from the US, leading to an investigation by the Office of the United States Trade Representative (USTR) earlier. In response, India defended the levy, emphasizing its non-discriminatory nature, prospective application, and alignment with international tax principles outlined by the OECD/G20 BEPS Project. To mitigate potential trade conflicts, both countries agreed to a transitional approach that allows India to maintain the equalization levy while the US suspends any trade retaliatory measures until March 31, 2024, or upon the implementation of Pillar One of the OECD’s global tax reform initiatives, whichever is earlier.
“The extension till June 30 provides more time for the implementation of Pillar One and ensures continued stability for businesses operating in the digital space,” he said.