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December 1, 2021

India and US agree on transitional approach for India’s 2% Equalization Levy prior to implementation of Pillar One rules

Executive summary

On 24 November 2021, the Government of India issued a Press Release stating that India and the United States (US) have agreed on a transitional approach to the treatment of the current Indian e-commerce Equalization Levy (EL) during the interim periodbefore the OECD2 BEPS new Pillar One3 rules come into effect.

The transitional treatment4 includes the continuation of the 2% EL charge by India, subject to a partial future credit to the multinational enterprise (MNE) against that MNE’s future “Pillar One Amount A” tax liability. The US Government, in turn, agreed to terminate its proposed trade actions against India with respect to the current 2% EL. 

This Alert summarizes the development and implications for nonresident taxpayers.

Detailed discussion


In October 2021, the OECD released a statement reflecting the agreement reached by 137 of the 141 member-jurisdictions of the OECD/G205 Inclusive Framework on BEPS on the two-pillar project to address the tax challenges of the digitalization of the economy. Pillar One of the two-pillar project aims to allocate new taxing rights to market jurisdictions through new nexus and profit allocation rules. The profits to be allocated to market jurisdictions under Pillar One are defined as “Amount A.”

Under the agreed Amount A framework, the Multilateral Convention (MLC) implementing Amount A of Pillar One will require countries to remove all Digital Services Taxes (DSTs) and other relevant similar measures (i.e., unilateral measures) and not to enact new DSTs or other relevant similar measures from 8 October 2021 until the earlier of 31 December 2023 or the coming into force of the MLC.

Subsequent to the OECD statement, the US has entered into negotiations with a number of European countries to agree on a transitional approach to the treatment of unilateral measures until the new Pillar One rules come into effect. The agreement was reflected in a statement released on 21 October 2021 between the US and other European countries (the 21 October 2021 Joint Statement).

India has introduced the 2% EL on e-commerce supplies or services undertaken by nonresident e-commerce operators (NR EOP) not having a permanent establishment in India as of 1 April 2020. Pursuant to trade investigations, the US found India’s 2% EL to be discriminatory and proposed tariff retaliatory measures on India which were subsequently suspended for 180 days in lieu of the ongoing discussions on the BEPS two-pillar solution.

With the deadline of 180 days soon approaching and several other countries reaching a compromise with the US in respect of their unilateral measures, a similar announcement between India and the US was anticipated.

Current Press Release

The Press Release issued by the Indian Government states that India and the US have agreed that the same terms that apply under the 21 October 2021 Joint Statement will apply between the US and India with respect to India’s charge of the 2% EL. The final terms of the agreement will be finalized by 1 February 2022.

Considering the Press Release and the 21 October 2021 Joint Statement, the impact on India’s EL may be as follows:

  • India will not be required to withdraw the 2% EL until Pillar One takes effect. However, India will allow a credit of a portion of the 2% EL chargeable on NR EOP (belonging to an MNE) during the “interim period” against that MNE’s future Pillar One Amount A tax liability when the Pillar One rules are in effect.

  • Pursuant to the Press Release, the interim period will be from 1 April 2022 until the implementation of Pillar One or 31 March 2024, whichever is earlier.

  • The US will terminate its proposed trade actions against India regarding the 2% EL.

  • India and the US will remain in close contact to ensure that there is a common understanding of the respective commitments and will endeavor to resolve any further differences of views on this matter through constructive dialogue.


The Press Release is an important development in the ongoing dispute between the US and India over the 2% EL. The final terms of the agreement are still outstanding and will be available by 1 February 2022. However, as the Press Release states that the same terms that apply under the 21 October 2021 Joint Statement will apply between the US and India with respect to India’s charge of the 2% EL, the final agreement between the US and India is likely to be similar to the text of the 21 October 2021 Joint Statement.

The Press Release only refers to the 2% EL on e-commerce supplies or services. Consequently, it is not clear whether the agreement will cover other unilateral measures, such as the EL on advertising services or the provisions relating to significant economic presence, which are currently in force under the Indian tax laws.

The 21 October 2021 Joint Statement does not provide any credit for an EL liability of an MNE that is not subject to a Pillar One liability in a particular country within four years after Pillar One comes into effect in such country. Accordingly, pending the final terms, clarity is needed to understand whether MNEs that are not within the scope of Pillar One would receive any form of relief for an EL liability.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (India)

Ernst & Young LLP (United States), Indian Tax Desk, New York

Ernst & Young LLP (United States), Indian Tax Desk, San Jose

Ernst & Young LLP, Indian Tax Desk, Singapore

Ernst & Young LLP (United Kingdom), Indian Tax Desk, London

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago



  1. Beginning 1 April 2022 until the implementation of Pillar One or 31 March 2024, whichever is earlier.

  2. Organisation for Economic Co-operation and Development.

  3. As part of the measures to address Base Erosion and Profit Shifting (BEPS) under Action 1: Tax Challenges Arising from Digitalisation.

  4. The Press Release states that the transitional terms between India and the US are the same as applicable under the joint statement released by the US with five European countries on 21 October 2021.

  5. Group of 20.


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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