India, U.S Extend Equalization Levy Deadline on E-Commerce Transactions

India-US agreement on extending the digital equalization levy

India and the United States agreed to extend the 2 percent equalization levy, or digital tax, on e-commerce transactions until June 30. The announcement was made by India’s Ministry of Finance and the U.S. Treasury on June 28, 2024. Originally, the levy was set to expire on March 31, 2024. US digital companies operating in India will need to furnish tax for this period.

Reports indicate that this extension addresses the taxation issue for the first quarter (Q1) of FY 2024–25, with final guidelines for Q2 FY 2025 and beyond to be provided in the upcoming July union budget.

Background

On October 8, 2021, India and the US agreed to a two-pillar solution to address the tax challenges arising from the digitization of the economy, joining 134 other members of the OECD/G20 Inclusive Framework (including Austria, France, Italy, Spain, and the UK) in a significant reform of the international tax system.

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In the following month, India and the United States reached a deal allowing New Delhi to impose the 2 percent levy until March 31, 2024, or until the implementation of Pillar 1 of the OECD agreement on taxing multinationals and cross-border digital transactions.

Chapter VIII (Section 160 to 177) of the Finance Act, 2016 deals with the equalization levy in India. It specifies that if the taxpayer fails to deduct or deposit the equalization levy by the deadline, interest on the outstanding amount will be assessed at the rate of 1 percent every month or portion of the month. 

Understanding the equalization levy (also commonly known as ‘digital tax’)

Given the rapid annual growth of the Indian digital economy, surpassing that of the global economy, the taxation of digital transactions has become a significant issue. E-commerce giants like Google and Facebook generate substantial revenue from sources outside their home countries through their operational expansion. Before 2016, these multinational companies were exempt from paying taxes in India because their services were not provided within the country, and they did not have a permanent establishment (PE) here. However, in 2016, the Ministry of Finance addressed this issue by introducing a new digital equalization levy in the union budget.

There are two conditions to be met to be liable for the equalization levy in India:

1. The payment should be made by a non-resident service provider.
2. The annual payment made to the service provider exceeds INR 100,000 (US$1,198) in one financial year.

India expanded the scope of the equalization levy effective April 1, 2020 (Finance Act 2020). The equalization levy was expanded in scope to introduce a tax on e-commerce supply or services equal to 2 percent of gross income facilitated by a non-resident e-commerce operator.

Exclusion from the equalization levy

If the non-resident service provider has a PE in India and the service requested is connected to that office, it will be excluded from the equalization levy.

In addition, if the total amount paid for the service is less than INR 100,000 (US$1,198), and the service is not intended for professional or work-related use, it may be exempt from the equalization levy. Under Section 10(50) of the India Income Tax Act, income accruing to a non-resident from supplying specified services on which an equalization levy under Section 165 is levied shall be exempt for the purpose of calculating taxable income for the purpose of paying income tax. Income considered as fees or royalties for technical services is not included for equalization levy purposes.

What is the OECD’s two-pillar approach?

Since 2019, the outline for the OECD proposal has been under review. The proposal suggests that large companies should pay less tax in countries where their headquarters, workforce, and operations are located, and more tax in the countries where they have customers. Additionally, the deal establishes a 15 percent worldwide minimum tax, increasing taxes for businesses with earnings in low-tax areas.

In recent years, the OECD has been developing a more long-term and practical plan to reduce tax planning by multinational corporations and to reform tax regulations for major companies. Its Inclusive Framework on Base Erosion and Profit Shifting (BEPS) aims to reach a consensus on a two-pronged strategy to combat tax evasion, ensure the consistency of international tax laws, and ultimately create a more transparent tax environment. Pillar One seeks to change the tax jurisdictions in which corporations pay their taxes, while Pillar Two aims to establish a worldwide minimum tax.

Revising the OCED’s Pillar Two approach

In January 2024, the OECD revised its estimates for the global minimum tax revenue. It now predicts that the tax will generate US$155–192 billion annually worldwide, accounting for 6.5–8.1 percent of global corporate income tax revenues. This is a decrease from the earlier estimate of US$220 billion in additional annual global tax revenue.

In 2022, after extensive negotiations, the European Union (EU) unanimously agreed to implement Pillar Two. The EU Directive required member countries to incorporate this into their national laws by the end of 2023. From January 1, 2024, companies with an annual turnover of at least €750 million, including entirely domestic groups meeting the revenue threshold, will be subject to the 15 percent minimum tax rate.

As of January 12, 2024, 37 countries have either introduced draft legislation or finalized laws to incorporate Pillar Two’s model rules. An additional 13 jurisdictions plan to implement Pillar Two, though they have yet to propose legislation.

(US$1 = INR 83.45)

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