The Indian government has announced an extension of the 2% digital tax on e-commerce supplies levied on American digital companies operating in India. This extension applies until June 30th, 2024.
OECD Agreement and Pillar 1: In October 2021, India, the US, and 134 other members of the OECD/G20 Inclusive Framework reached a consensus on a two-pillar solution to address the challenges of taxing multinational corporations and cross-border digital transactions. Pillar 1 of this agreement focuses on ensuring a fairer distribution of taxing rights for highly profitable multinational enterprises (MNEs) with a significant and sustained presence in a market, regardless of physical location.
Original Agreement Between India and US: Building on this framework, India and the US established a bilateral agreement in November 2021. This agreement permitted India to impose a 2% levy on e-commerce supplies from US companies until March 31, 2024, or until the implementation of Pillar 1 of the OECD agreement, whichever came first.
Call for Finalizing Pillar 1 Text: As of December 18, 2023, efforts were underway to finalize the text of the Pillar 1 multilateral convention by March 2024, with a target signing ceremony by June 2024. However, a definitive consensus on the agreement has yet to be reached.
Due to the ongoing negotiations and the yet-to-be-finalized Pillar 1 agreement, India and the US have opted to extend the terms of their original agreement. This extension ensures continued application of the 2% digital tax on US e-commerce companies in India until June 30th, 2024.
Introduction and Purpose: The Equalisation Levy, also known as the "Google Tax," was introduced in India in 2016. This levy specifically targets income earned by foreign e-commerce companies operating in India, focusing on business-to-business transactions.
Addressing Tax Loopholes: The Equalisation Levy aims to address situations where e-commerce companies establish a presence in India but conduct billing through international markets. This strategy allows them to potentially avoid India's cross-border tax regime. The levy brings these non-resident companies serving Indian customers under the purview of Indian taxation.
Levy Mechanism: The Equalisation Levy functions as a direct tax withheld at the time of payment by the service recipient. It applies when payments exceeding INR 1 Lakh (approximately USD 1,230) in a financial year are made to non-resident service providers.
The extension of the digital tax signifies India's commitment to ensuring a fairer tax system for the digital economy. While the impact of the levy varies across different sectors, it represents a step towards ensuring that multinational corporations contribute their fair share of taxes in the markets they operate in.
As negotiations on the OECD's Pillar 1 agreement progress, it remains to be seen if a consensus will be reached by the June 2024 target. The finalization of this agreement could potentially lead to a broader, multilateral framework for taxing digital transactions.
The equalisation levy imposed by India on non-resident digital companies has had varied impacts across different sectors. In 2021, companies like Netflix opted not to pass on the levy directly to Indian consumers to maintain competitive pricing. On the other hand, Google passed on India’s 2% Equalisation Levy, implemented in April 2020, to its clients whose advertisements were visible in India.