India and the United States have decided to extend the 2 percent equalisation tax, or digital tax, on e-commerce supplies until June 30 to keep digital businesses stable, the finance ministry said on Friday. Initially, it was scheduled to end on March 31.
According to experts, the US has suspended all trade retaliation measures till June 30, 2024 or until the implementation of Pillar 1 of the OECD's global tax reform initiative, whichever is earlier. Further clarification on the issue should come in the coming months, experts said. Effective from April 1, 2020, India has imposed an equalization tax (EL) of 2% on amounts received/accepted by non-resident e-commerce operators from e-commerce supplies or services. The tax catches many cross-border e-commerce transactions where there is no local physical presence.
India and the US joined 134 other countries of the OECD/G20 Inclusive Framework (including Austria, France, Italy, Spain and the UK) in reaching an agreement on a statement on a two-pillar solution to address tax challenges arising from the digitalisation of the economy on 8 October 2021. On 21 October 2021, the US, Austria, France, Italy, Spain and the UK reached a political compromise on a transitional approach to the unilateral measures in place while pillar 1 is in place.
On November 24, 2021, India and the US agreed that with regard to India's levy of 2% equalisation tax on the supply of e-commerce services and US trade measures with respect to said equalisation tax, the same terms and conditions that applied in the Joint Statement of October 2021 will be applicable between India and the US. The effective period of this agreement was from April 1, 2022 until the implementation of pillar 1 or March 31, 2024, whichever is earlier. Now, this has been extended by another month.
Aravind Srivatsan, tax leader at law firm Nangia Andersen, said the US has accused India of stalling the two-pronged negotiations.The deal is meant to protect the interests of US multinational companies and prevent the equalisation tax from becoming a sunk cost of doing business in countries that impose a digital services tax (DST).
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Pillar 1 Obligations
As per the agreement, India along with other mentioned countries will have to credit the equalisation levy collected against future Pillar 1 obligations. “This overall arrangement is expected to be further extended till a final agreement on Pillar 1 is reached,” he said.
Amit Maheshwari, tax partner at AKM Global, said the equalization tax has raised trade concerns in the US and has previously led to an investigation by the Office of the United States Trade Representative (USTR). India has responded by defending the tax, highlighting its non-discriminatory nature, future application and alignment with international tax principles outlined in the OECD/G20 BEPS project. To mitigate potential trade disputes, the two countries agreed to a transitional approach that would allow India to maintain the equalization tax while the US suspends trade retaliation measures until March 31, 2024 or the implementation of Pillar 1 of the OECD's global tax reform initiative, whichever is earlier.
“The extension until June 30 will give more time to implement Pillar 1 and ensure the continued stability of companies operating in the digital sector,” he said.
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