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India and US agree on transitional approach of 2% Indian Equalisation Levy and US trade actions

India and United States of America (USA) recently have reached an agreement to adopt a transitional approach on 2% Equalisation levy (2% EL). This was announced vide issue of press release dated November 24, 2021 by Indian Ministry of Finance, Government of India.

On 8 October 2021, India and USA joined 134 other members of the Organisation for Economic Co-operation and Development (OECD)and 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 tax Challenges arising from digitalization of the economy. As part of the agreement, all signing countries are required to withdraw their existing Digital Services Taxes (DSTs) and other unilateral measures. Further, countries have committed not to introduce any new unilateral measures during the interim period.

On October 21, 2021, Austria, France, Italy, Spain and the United Kingdom had reached an agreement with the USA on a transitional approach to existing unilateral measures while implementing Pillar one (joint agreement). These five countries had preferred that the withdrawal of unilateral measures be contingent on the implementation of Pillar One, while USA preferred withdrawal of unilateral measures with immediate effect (i.e., from 8 October 2021 – the date on which political agreement with respect to Pillar One was reached).

India and the US have now agreed that the same terms that apply under the joint agreement shall apply to the agreement with India. However, the applicable interim period will be from 1 April 2022 till the implementation of Pillar One or 31 March 2024, whichever is earlier. Both countries have also agreed that they will remain in close contact to ensure that there is a common understanding of the respective commitments.

This  agreement follows the trade tensions between India and the US on account of the findings of United States Trade Representative (USTR) under S.301 of the US Trade Act, 1974. The USTR concluded that 2% EL was inconsistent with the principles of international taxation and discriminatory against US companies and that it should, therefore, be repealed. The announcements however does not have a mention of other India digital tax measures i.e. 6% Indian EL on online advertisement or related services.

The final terms of the Agreement shall be finalised by 1st February 2022.

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