India and the US reached a bilateral agreement on Wednesday that will now allow New Delhi to continue to impose the 2% equalization levy (so-called Google tax) on digital services that are offered in India by MNEs that are US-based without any residence here for a short period before this year. The period will be abutting with when the OECD tax deal will take place or the end of 2023-24 fiscal, whichever is earlier.
The leeway will provide a temporary boost to India’s coffers, though it may have to take out the excess tax amounts that are collected; over what the Pillar-1 of the OECD agreement entails- to the huge US MNEs once the multilateral agreement is in use. The difference in tax liabilities on the stated MNEs under the 2 regimes- equalization levy and Pillar one- shall be computed on the grounds of the first year of Pillar-1 implementation.
Tax experts certainly feels that the agreement between India-US, which as well avoids Washington from taking any sort of retaliatory trade action against India recognizing the equalization levy, will put to rest trade problems between both the nations.
The framework of OECD was reached by 136 nations including the US and India on 8th October to state the tax challenges coming up sue to the digitalization of economies under a two-pillar solution. Pillar-1 will imply to MNEs with profit above 10% and international turnover almost above 20 billion euros. The profit is to be given to markets which will be calculated as 25% of the profit before tax in more of 10% of revenue. Pillar Two shows a new global minimum corporate tax rate that is set at 15%.
The two-pillar solution was accepted and approved by the G20 finance ministers meeting that held in Washington on 13th October and then by the leaders of G20 on 30th October.
India introduced new equalization levy of 6% advertisement services that is online by non-residents in 2016 and then later made it bigger in 2020 by launching 2% levy on non-resident e-commerce firms. The agreement with the US covers only 2% tax. The final things of the agreement will be finalized by 1st February 2022, stated by the finance minister.
“Interestingly, 6% EL on online ad revenue does not form a part of this deal. The relief is likely to apply only to those US MNEs that are covered under Amount A. No relief may be offered to US MNEs that are subject to 2% EL but do not fall within the scope of Amount A of Pillar 1 during a defined period. This is notable considering that India’s revenue threshold for 2% EL is as low as Rs 2 crore in a tax year, whereas Amount A only applies to MNEs with a global turnover of 20 billion Euros,” stated by GouriPuri, partner, ShardulAmarchandMangaldas& Co.
“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,” US treasury department stated on Wednesday in a statement.
India managed to collect Rs 2,200 crore as equalization levy in FY21 and is expected to project generate revenue of over almost Rs 3,000 crore in FY22. “Essentially the terms call for a status quo on any retaliatory measures pending the implementation of the Pillar 1 solution,” stated by RohintonSidhwa, partner, Deloitte India.