Equalisation Levy 2020

In News

• Recently, India and USA agreed on a transitional approach on Equalisation Levy 2020.

About

• India and United States joined 134 other members of the OECD/G20 Inclusive Framework (including Austria, France, Italy, Spain, and the United Kingdom) in reaching agreement on the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy.
  • 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.
• The United States and Austria, France, Italy, Spain, and the United Kingdom reached an agreement on a transitional approach to existing Unilateral Measures while implementing Pillar 1. 
• India and the United States have agreed that the same terms that apply under the October 21 Joint Statement shall apply between the United States and India with respect to India’s charge of 2% equalisation levy on e-commerce supply of services and the United States’ trade action regarding the said Equalisation Levy. 

• The settlement is broadly on the lines of the one reached under the Unilateral Measures Compromise reached among the UK, Austria, France, Italy and Spain with the US on October 21 this year.
• However, the interim period that will be applicable will be from 1st April 2022 till implementation of Pillar One or 31st March 2024, whichever is earlier.
• The final terms of the Agreement shall be finalised by 1st February 2022.

Background of the issue

• The U.S. administration had announced initiation of investigation under section 301 of the U.S. Trade Act, 1974 against the taxation on digital services adopted or under consideration by countries, including the Equalisation Levy applied by India. 
• With respect to India, the focus of the investigation was on the 2% Equalisation Levy (EL) levied by India on e-commerce supply of services. 
• The U.S. investigation included whether the EL discriminated against the U.S. companies, was applied retrospectively, and diverged from U.S or international tax norms due to its applicability on entities not resident in India.
• It was clarified that the EL was applied only prospectively, and has no extra-territorial application, since it is based on sales occurring in the territory of India through digital means.
• India based e-commerce operators are already subject to taxes in India for revenue generated from the Indian market. However, in the absence of the EL, non-resident e-commerce operators (not having any Permanent Establishment in India but significant economic presence) are not required to pay taxes in respect of the consideration received in the e-commerce supply or services made in the Indian market. 
• Applicability: 
  • The EL levied at 2% is applicable on non-resident e-commerce operators, not having a permanent establishment in India. 
  • The threshold for this levy is Rs. 2 crores, which is very moderate and applies equally to all e-commerce operators across the globe having business in India. 
  • The levy does not discriminate against any U.S. companies, as it applies equally to all non-resident e-commerce operators, irrespective of their country of residence.
• Suggested by: 
  • In addition, EL was one of the methods suggested by 2015 OECD/G20 Report on Action 1 of BEPS Project which was aimed at tackling the taxation challenges arising out of digitization of the economy.

Significance of Recent Agreement

• 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.
• The deal requires countries to remove all digital services tax and other similar unilateral measures.
• It will ensure a level-playing field with respect to e-commerce activities undertaken by entities resident in India, and those that are not resident in India, or do not have a permanent establishment in India.
• It will ensure fair competition, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations.

Conclusion

• This agreement is a sensible solution that will allow nations to concentrate on their collaborative action over the execution of the iconic OECD/G20 Inclusive Framework deal.   

Source: PIB