India-US Digital Tax Deal

• 26 Nov 2021

Why in News

Recently, India and the United States have agreed for a transitional approach on equalisation levy or digital tax on e-commerce supplies beginning from 1^st April, 2022.

• Earlier in January 2021 , the Office of the United States Trade Representative (USTR) had said that the Digital services taxes adopted by India, Italy and Turkey discriminate against US companies.

Key Points

• Background:
  
  • On 8^th October, 2021, 136 countries, including India, agreed to enforce a minimum corporate tax rate (Global tax Deal) of 15%, as well as an equitable system of taxing profits of big companies in markets where they are earned.
    
    • The deal requires countries to remove all digital services tax and other similar unilateral measures.
  • After that, the US, Austria, France, Italy, Spain and the United Kingdom reached an agreement on a transitional approach to existing unilateral measures while implementing Pillar one
• Global Tax Deal:
  
  • It is tailored to address the low effective rates of tax shelled out by some of the world’s biggest corporations, including Big Tech majors such as Apple, Alphabet and Facebook.
  • The global minimum tax rate would apply to overseas profits of multinational firms with USD 868 million in sales globally.
    
    • Pillar 1 (Minimum tax and subject to tax rules): Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits.
    • Pillar 2 (Reallocation of additional share of profit to the market jurisdictions): Allows 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.
• India-US Deal:
  
  • India and the US have agreed that the same terms (as agreed by US, Austria, France, Italy, Spain and the United Kingdom) shall apply between the US and India with respect to India's charge of 2% equalisation levy on e-commerce supply of services and the US' trade action regarding the said Equalisation Levy.
  • Under the agreement, India will continue to impose the levy till March 2024, or till the implementation of the Pillar 1 of the Organisation for Economic Cooperation and Development (OECD) agreement on taxing multinationals and cross-border digital transactions.
    
    • 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 US will terminate the trade tariff actions it had announced in response to the levy and will not take any further actions.
• Significance of India-US Deal:
  
  • It 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.
  • This would help prevent the tax loss arising due to online transactions as India has to roll back Equalisation Levy (EL) 2.0 any way after Pillar 1.
    
    • 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.

Digital Services Taxes (DSTs)

• These are the adopted taxes on revenues that certain companies generate from providing certain digital services. E.g. digital multinationals like Google, Amazon and Apple etc.
• The OECD is currently hosting negotiations with over 130 countries that aim to adapt the international tax system. One goal is to address the tax challenges of the digitalization of the economy.
  
  • Some experts argue that a tax policy designed to target a single sector or activity is likely to be unfair and have complex consequences.
  • Further, the digital economy cannot be easily separated out from the rest of the global economy.

India's Tax on Digital Companies

• The government had moved 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 equalisation levy that, till 2020, only applied to digital advertising services.
  • Earlier, the equalisation levy (at 6%) was introduced in 2016 and imposed on the revenues generated on business-to-business digital advertisements and allied services of the resident service provider.
• The new levy came into effect from 1^st April 2020. E-commerce operators are obligated to pay the tax at the end of each quarter.

Source: IE