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Govt inks deal with US to phase out equalisation levy

On October 8 this year, 136 countries, including India, agreed to enforce a minimum corporate tax rate of 15 per cent, 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.

By: ENS Economic Bureau | New Delhi |
November 25, 2021 4:00:41 am
The deal requires countries to remove all digital services tax and other similar unilateral measures.

Signing a pact for the transition from equalisation levy, India and the US on Wednesday agreed for a transitional approach on equalisation levy or digital tax on e-commerce supplies beginning April 1, the Finance Ministry said on Wednesday.

“India and the United States have agreed to the same terms … shall apply between the United States and India with respect to India’s charge of 2 per cent 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. “This compromise represents a pragmatic solution that helps ensure that countries can focus their collective efforts on the successful implementation of the OECD/G20 Inclusive Framework’s historic agreement on a new multilateral tax regime and allows for the termination of trade measures adopted in response to the Indian equalization levy,” the US government said in its statement.

On October 8 this year, 136 countries, including India, agreed to enforce a minimum corporate tax rate of 15 per cent, 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.

Explained

Part of agreement

India is among the 136 countries to have agreed to enforce a minimum corporate tax rate. The deal requires countries to remove all digital services tax and other similar unilateral measures.

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.

On October 21, the United States, Austria, France, Italy, Spain and the United Kingdom agreed on a transitional approach to existing unilateral measures while implementing Pillar one.

The final terms of the agreement between India and the US shall be finalised by February 1, 2022, the Ministry added.

The US had earlier conducted a year-long investigation beginning in June 2020 into digital services taxes, stating that they are against tech companies like Apple, Amazon, Google and Facebook. It had said that the digital services taxes adopted by Austria, India, Italy, Spain, Turkey, and the United Kingdom discriminated against US digital companies and were inconsistent with principles of international taxation and burdened US companies. Tax experts said it will put to rest the trade conflict between India-US because of digital service taxes and will certainly facilitate ongoing trade negotiations between the countries.

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.

“…interestingly, 6% EL on online ad revenue does not form a part of this deal. While the fine print is awaited, one can take guidance from the deal that the US entered into with the UK, Austria, France, Italy and Spain in October, 2021,” Gouri Puri, partner, Shardul Amarchand Mangaldas & Co said.

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