India-US Digital Tax Deal
- Recently, India and the US agreed on a transitional method on equalisation levy or digital tax on e-commerce goods, which would take effect on April 1, 2022.
- The Office of the United States Trade Representative (USTR) had previously said in January 2021 that the Digital Services Taxes imposed by India, Italy, and Turkey are discriminatory against US firms.
Digital Services Taxes (DSTs)
- These are the taxes that have been imposed on the revenues that certain businesses make from the provision of certain digital services. Digital conglomerates such as Google, Amazon, and Apple, for example.
- The Organization for Economic Cooperation and Development (OECD) is now hosting discussions with over 130 nations to adjust the worldwide tax system.
- One objective is to handle the tax issues that have arisen as a result of the economy's digitization.
- According to some analysts, a tax policy aimed at a specific industry or activity is likely to be unjust and have complicated repercussions.
- Furthermore, the digital economy is inextricably linked to the rest of the global economy.
- On October 8, 2021, 136 nations, including India, agreed to impose a minimum corporate tax rate of 15%, as well as an equal method of taxing major firms' earnings in the markets where they are earned (Global Tax Deal).
- The agreement calls for all digital services taxes and other unilateral actions to be repealed.
- Following that, the United States, Austria, France, Italy, Spain, and the United Kingdom agreed on a translational approach to current unilateral measures while adopting Pillar one.
Tax Treaty Around the World
- It's designed to address some of the world's largest firms' low effective tax rates, including Big Tech giants like Apple, Alphabet, and Facebook.
- Multinational companies having worldwide sales of USD 868 million would be subject to the global minimum tax rate.
- Pillar-1-Minimum tax and subject to tax rules
- **Governments may still establish whatever local corporate tax rate they wish, but if corporations pay lower rates in a specific nation, their home governments might ""top up"" their taxes to the 15 percent minimum, removing the benefit of transferring earnings.
- Pillar-2-Reallocation of additional profit to market jurisdictions
- **Allows nations where revenues are produced to tax 25% of the largest multinationals' so-called excess profit – defined as profit exceeding 10% of revenue.
- India and the United States have agreed to apply the same conditions (as agreed by the United States, Austria, France, Italy, Spain, and the United Kingdom) to India's 2 percent equalisation tax on e-commerce services and the United States' trade action in response to the Equalisation Levy.
- The fee will be in place until March 2024, or until the implementation of Pillar 1 of the Organisation for Economic Cooperation and Development (OECD) agreement on taxing multinationals and cross-border digital transactions, whichever comes first.
- India and the United States will maintain communication to ensure that both parties have a clear understanding of their respective commitments and to work out any remaining differences of opinion via constructive discourse.
- The United States will end the trade tariffs it had declared in reaction to the levy and will not take any additional measures.
The Importance of the India-US Agreement
- It benefits India since it can continue to levy the current 2% levy with certainty until Pillar 1 takes effect, as well as a pledge from the US side to end the planned trade measures and not impose new ones.
- As India must roll down Equalisation Levy (EL) 2.0 in some way beyond Pillar 1, this will assist reduce tax losses coming from internet transactions.
- It's important to remember that Pillar 1 only applies to enterprises with a global revenue of more than 20 billion euros, or the top 100 corporations.