India-US digital services tax deal: Potential trade conflict averted

New Delhi: With India and the US reaching a deal on digital services tax, a potential trade conflict between the nations has been averted as India gets to tax e-commerce supplies by non-resident firms till the end of March 2024 or till a proposed global tax deal is executed, whichever is earlier.

The US had in June announced retaliatory tariffs on certain goods from India, Austria, Italy, Spain, Turkey, and the UK, but immediately suspended it for 180 days to let the global tax negotiations progress.

With the latest deal, announced by the finance ministry on Wednesday, the threat of the additional tariffs kicking has been averted. In the case of India, the additional tariff was considered in retaliation to India’s digital services tax or equalisation levy.

India’s equalization levy applies to e-commerce supplies by non-resident firms at 2%. It covers all sorts of digital e-commerce transactions in India and transactions which use Indian data.

India and the US have also decided to remain in close contact to ensure that there is a common understanding of the respective commitments and try to resolve any further differences through talks. The final terms of the deal will be finalised next February.

The agreement coupled with the two-pillar solution agreed at G20 (the proposed global tax deal) potentially solves the prickly issue of equalization levy which otherwise had the potential to become a major irritant in the trade relations between the two countries, said Abhay Sharma, partner at law firm Shardul Amarchand Mangaldas & Co.

According to a USTR statement in January this year, of the 119 companies that it identified as likely liable under India’s 2% digital services tax on e-commerce supplies by non-resident businesses, 86 or 72% were US companies.