US and India come to an agreement to settle 2% digital tax levy



In what could be a strategic move to strengthen the ties between US and India, the Indian government has decided to repeal the 2% equalization levy on e-commerce operators, after both countries came to an agreement to settle differences.

The United States Trade Representative (USTR) said the agreement between the US Treasury and India’s Finance Ministry applies the same terms agreed to with Austria, Britain, France, Italy, Spain and Turkey, but with a slightly later implementation date.

The pact follows an October agreement by 136 countries in principle to withdraw their digital services taxes as part of a sweeping global tax deal agreed on Oct. 8 to adopt a 15 percent global minimum corporate tax and grant some taxing rights on large profitable companies to market countries.

Under the agreement, India will continue to impose the levy on March 31, 2024, or till the implementation of Pillar 1 of the OECD agreement on taxing multinationals and cross-border digital transactions.

“India and US have agreed that the same terms that apply under the October 21 joint statement shall apply between the US and India with respect to India’s charge of 2% equalization levy on e-commerce supply of services and the US’ trade action regarding the said equalization levy,” the finance ministry said in a statement. It added that India and the US will remain in ‘close contact’ to ensure there is a common understanding of the respective commitments, and any further differences of views on this matter are resolved through constructive dialogue.

The final terms of the agreement will crystalize by February 1, 2022, the ministry added.

“Under this agreement, and consistent with and applying the same terms as the earlier agreements with Austria, France, Italy, Spain, the United Kingdom, and Turkey, in defined circumstances the liability from India’s equalization levy on e-commerce supply of services that US companies accrue in India during the interim period will be creditable against future taxes accrued under Pillar 1 of the OECD agreement. The period during which the credit accrues will, however, be from April 1, 2022, until either the implementation of Pillar 1 or March 31, 2024 (whichever is earlier),” the USTR said in a statement.

As per the statement, the US will terminate the currently-suspended additional duties on goods of India that had been adopted in the DST Section 301 investigation.

“The India-USA agreement on a transitional approach is beneficial to India as it can carry on with the present 2% levy with certainty until Pillar 1 takes effect,” said Amit Maheshwari, tax partner at tax and consulting firm AKM Global.

Once the OECD agreement rolls out, the 2% equalization levy will have to be withdrawn. This applies to other countries as well that have imposed a similar tax.

According to the terms agreed upon by five countries in the October 21 agreement, India will have to provide credit if collected tax over this period is more than it gets when the OECD regime rolls out for a similar period.

USTR said for India, the starting date for those credits was pushed back to April 1, 2022, with a three-month extension beyond the end of 2023 if the OECD tax deal is not implemented by that time.