India, US Reach Settlement on 2% Equalization Levy

India and the United States have reached an agreement to settle differences relating to the 2% equalization levy imposed by New Delhi on e-commerce operators.

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.

Under the agreement, India will continue to impose the levy March 31, 2024, or till the implementation of Pillar 1 of the OECD agreement on taxing multinationals and cross-border digital transactions.

The US will terminate the trade tariff actions it had announced in response to the levy and will not take any further actions.

“India and US have agreed that the same terms that apply under the October 21 joint statement shall apply between the US and India with respect to India’s charge of 2% equalization levy on e-commerce supply of services and the US’ trade actions regarding the said equalization levy,” the finance ministry said in a statement. It added that India and the US will remain in ‘close contact’ to ensure there is a common understanding of the respective commitments, and any further differences of views on this matter are resolved through constructive dialogue.

The final terms of the agreement will crystalize by February 1,2022, the ministry added.

“Under this agreement, and consistent with and applying the same terms as the earlier agreements with Austria, France, Italy, Spain, the United Kingdom, and Turkey, in defined circumstances the liability from India’s equalization levy on e-commerce supply of services that US companies accrue in India during the interim period will be creditable against future taxes accrued under Pillar 1 of the OECD agreement. The period during which the credit accrues will, however, be from April 1, 2022 until either the implementation of Pillar 1 or March 31, 2024 (whichever is earlier),” the USTR said in statement.

As per the statement, the US will terminate the currently-suspended additional duties on goods of India that had been adopted in the DST Section 301 investigation.

The statement added that USTR was proceeding with formal steps required to terminate this Section 301 trade action and in coordination with Treasury, will monitor implementations of the agreement going forward.

“The India-USA agreement on a transitional approach is beneficial to India as it can carry on with the present 2% levy with certainty until Pillar 1 takes effect,” said Amit Maheshwari, tax partner at tax and consulting firm AKM Global.

Once the OECD agreement rolls out, the 2% equalization levy will have to be withdrawn. This applies to other countries as well that have imposed a similar tax.

According to the terms agreed upon by five countries in the October 21 agreement, India will have to provide credit if collected tax over this period is more that it gets when the OECD regime rolls out for a similar period.

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