India and the United States have agreed to continue the 2% equalization levy or digital tax on e-commerce supplies until June 30, 2024. This is part of a large-scale effort to overhaul the international tax regime to address taxation of cross-border digital trade. 

Equalization Levy

On October 8, 2021, India and the US were among 135 countries that are members of the OECD/G20 Inclusive Framework aimed at addressing tax issues relating to the digital economy. The deal concerns a bipartite plan for tackling digital taxation.

The 2% equalization levy applies to e-commerce supplies. The agreement was initially valid from April 1, 2022, until Pillar 1 implementation or March 31, 2024, whichever comes first. Due to these changes, the validity of this policy has been given up to 30th June 2024. 

Implementation of Pillar 1

Pillar One is a key aspect of the BEPS 2.0 initiative, which focused on the problems related to the taxation of the digital economy and the creation of a cleaner tax environment. Pillar One shifts taxable profits to market locations for giant multinational businesses. This reallocation affects the effective tax rate, cash taxes, and transfer pricing strategies. The OECD aims to broaden the scope of the entities to which Pillar One will apply over time. Introduction timing is determined by the acceptability of several jurisdictions.

Even though it is technically less complex than prior proposals, the technicality of Pillar One remains high. Digital services taxes and similar measures will be abolished; however, it is still uncertain what specific changes will be made. The scope is no longer limited to those business models that are highly digitized; and expanded to other industries. On October 11, 2023, the OECD released the latest agreement called the Multilateral Convention to Implement Amount A of Pillar One (MLC) for coordinating the reallocation of taxing rights to market jurisdictions and enhancing tax certainty.

Benefits of Pillar 1

Pillar One redistributes taxable profits to market locations for large corporations. This guarantees that profits are shared more equally according to value addition rather than the country of operation jurisdiction of legal entities. Pillar One helps to decrease international companies‘ practices of shifting their profits into low-tax countries and paying taxes in countries where they operate. It fosters global partnerships and collaboration with other countries and organizations. 

Countries cooperate to develop a coherent tax environment that reduces disagreements and ambiguity. Pillar One nets out the advantage by expanding its definition of digital business to include less digitized business models. It makes sure that all industries will enjoy fair taxation. The first pillar focuses on increasing the transparency and fairness of the tax processes in the interest of governments and enterprises around the globe. 

Global Cooperation

The US and other countries such as Austria, France, Italy, Spain, and the UK have also made agreements on the transitional arrangements for the use of unilateral measures while Pillar 1 is in place. Its purpose is to avoid any discrimination and discrimination between digital transactions and traditional ones. India and the US will continue their consultations so that each side has a clear understanding of the other parties’ obligations. The two countries want to address any problems which may arise concerning this matter diplomatically. 

Conclusion

It is a continuation of the ongoing process of adjusting tax measures to digital reality and achieving fair conditions for global e-commerce operations. Pillar One focuses on equitable taxation, addressing peculiarities of profit splits in the context of digitalization. 

Suraj Verma

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