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India-US compromise on 2% equalisation levy brings tax certainty for multination: Experts

Pranay Bhatia, International Liaison Partner
Partner - Tax & Regulatory Services

26 November 2021

The pact between the two countries explicitly states the period up to which the  levy will continue and clears any doubts among multinationals after the global tax agreement in October.

India and the US have agreed to a transitional approach to treating existing unilateral levies while implementing a new global tax framework to tax technology giants like Amazon, Facebook, etc. The interim period starts from April 1, 2022, till the implementation of the pillar one approach of digital taxation under the new tax framework or the date of 31st March 2024, whichever is earlier.

The unilateral measures by countries including India originate in the first place from the absence of international tax rules to tax technology giants until now.

India in 2020 imposed a 2 per cent equalisation levy on foreign e-commerce transactions. On October 8, a grouping of 136 countries including both New Delhi and Washington signed a deal that aims to provide fairer taxing rights to market economies where multinationals do significant business but pay little taxes.

ETCFO spoke with subject matter experts to find out what the US-India pact on 2% equalisation levy means for multinationals.

Tax certainty

The compromise reached between India and the US brings in an atmosphere of tax certainty for the businesses as it explicitly states the period up to which the levy will continue and in a way clears any doubts that otherwise may have existed among multinationals after the global tax pact had been agreed upon in October, experts said.

The pact also means, he said, that the additional tariffs announced by the US on imports of basmati rice, jewellery, seafood etc from India in response to a retaliatory measure to the 2 per cent equalisation levy are now suspended, and that’s to India's advantage, he finished.

Earlier this year, the US trade representative (USTR), upon investigation, had found the Indian equalisation levy, among other unilateral measures by countries, discriminatory and inconsistent with international tax principles. Through the additional tariffs on Indian imports, the US aimed to collect as much amount from India as the latter was collecting through equalisation levy.

Another expert, Pranay Bhatia, Partner and Leader, Tax and Regulatory Services at BDO India pointed out tax certainty is very important for businesses and the pact is a welcome step in that direction.

Not only the US-based multinationals but since the agreement done with India is on similar lines with the compromise made with other countries too, like France, Italy, Spain and the UK etc, so that will mean multinationals across the board are likely to get regulatory certainty on the unilateral measures adopted by such countries, Bhatia finished.

The way forward

The details of the US-India agreement will be finalised by February 1, 2022. One expert said it will be important to see how additional tariffs announced by the  US on imports from India would be phased out.

“What will exactly happen to those tariffs? And to what extent the US will encourage imports from India is a question that the Indian government would be looking at in those details. I am sure there is going to be a detailed discussion that will happen at the ministerial level,” the expert at a large multinational tax advisory firm, who did not wish to be identified, said.

The historic global tax deal signed under the Organisation for Economic Cooperation and Developmentor OECD framework allocates market economies 25 per cent rights to tax multinational’s profits in excess of 10 per cent. Multinationals above 20 billion euros  and profitability above 10 per cent are covered under the Pillar one approach which talks about digital taxation.