With the traditional approach of taxation facing challenges under digital economy, OECD came out with BEPS Action 1 – Digital Economy.
Taking a cue from BEPS Action 1, India introduced Equalization Levy (EL) on certain specified transactions. The scope of the levy was widened by the Finance Act 2020 (commonly known as EL 2.0). As per the enlarged scope, consideration received
by a non-resident e-commerce operator (operator) from an e-commerce supply of goods ds or service (or both) to specified persons will attract 2% EL.
Post the introduction, EL 2.0 was met with resistance and the United States Trade Representative (USTR) issued a notice in June 2020 to initiate an investigation under section 301 of Trade Act 1974.
This investigation focused on the alleged discrimination against US companies,retroactivity, unreasonable tax policy which included extraterritoriality, penalising technology companies by cherry-picking them based on their commercial success.
In response, India emphasised that EL 2.0 is not discriminatory and seeks to ensure a level playing field for commerce activities undertaken by entities resident in India.
In June 2021, USTR concluded its investigation and determined to impose additional tariffs up to 25% on certain goods from India. The decision was immediately suspended for 180 days (expiring on 29 November 2021) to provide additional time to complete the ongoing multilateral negotiations (OECD two pillar approach) on international taxation at the OECD.
On 8 October 2021, the OECD released a statement reflecting the agreement reached by 137 of the 141 member-jurisdictions of the OECD/G20 Inclusive Framework on BEPS on the two-pillar project. Pillar One of the two-pillar project aims to allocate new taxing rights to market jurisdictions through new nexus and profit allocation rules. The profits to be allocated to market jurisdictions under Pillar One is termed a “Amount A”.
On 24 November 2021, India and the US agreed that the same terms that apply under the joint statement released by the US with five European countries on 21 October 2021 shall apply between the US and India with respect to India’s charge of 2% EL.
As per the Agreement, while the US shall terminate its trade actions against India, India will not be required to withdraw 2% EL until Pillar One takes effect. However, India will allow a credit of a portion of the 2% EL chargeable on non-resident e-commerce operators belonging to an MNE during the interim period against that MNE's future “Pillar One Amount A” tax liability, when Pillar One rules are in effect. As per the Press Release, the interim period will begin from 1 April 2022 till the implementation of Pillar One or 31 March 2024, whichever is earlier.
Time to Phase out EL
While it will take some time before India rolls back the levy in its entirety, it would be interesting to see the modality that will be agreed upon between India and the US. Taking a cue from the October 2021 Joint Statement, the modality could have the following attributes:
India does not withdraw the Unilateral Measures they have enacted until Pillar One takes effect.
• 2% EL accruing during the interim period exceeding an amount equivalent to the tax due under Pillar One Amount A in the first full year of implementation (adjusted proportionally with the length of the interim period), will be creditable against the income tax liability under Pillar One in India.
• This credit is to be applied in the first year that the US Company is subject to Amount A tax liability arising under
Pillar One and the excess credit may be carried forward for subsequent years (say 4 years). The carry forward of unused credit may not be allowed indefinitely (as against provided in the October 2021 Joint Statement).
With the last date for finalising the modalities coinciding with the Union Budget 2022 i.e., 1 February 2022 the Finance Minister could make some announcements in line with the joint statement entered with the US.
While it is unclear whether a similar relaxation could be extended to cover other unilateral measures, such as EL on advertisement services and whether MNEs that are not within the scope of Pillar One would receive any form of relief for EL liability, Budget 2022 may bring some clarity on these aspects.