US – India Tax Issues Explained

Source: The Hindu
GS II: International Relations

Overview

1. News in Brief
2. Background & Timeline (Key Milestones)
3. Current Scenario (as on September 6, 2025)
4. Conclusion

Why in the News?

Amid current tensions between Washington and Delhi over tariffs and purchase of Russian oil, U.S. President Donald Trump said India and the United States have a “special relationship” and there’s nothing to worry about as the two countries “just have moments on occasion”.

News in Brief

• India’s “Equalisation Levy” (EL) sparked a major tax-policy standoff with the United States in the past decade.
• What began as India’s unilateral attempt to tax the digital economy evolved into a multilateral negotiation under the OECD/G20’s “Pillar One” framework.
• As of 2025, India has withdrawn both components of its EL, easing bilateral frictions and resetting the agenda toward a rules-based international tax order.

Background & Timeline (Key Milestones)

• 1989–1990: India–U.S. Double Taxation Avoidance Agreement (DTAA) signed/enters into force; includes MAP and exchange-of-information provisions.
• 2015: India and the U.S. sign a FATCA Inter-Governmental Agreement (IGA) to automatically exchange financial account information, strengthening transparency.
• 2016: India introduces Equalisation Levy (EL 1.0)—6% gross levy on online advertisement services provided by non-residents without a PE in India. Often called the “Google Tax.”
• April 2020: EL 2.0—2% levy on non-resident e-commerce operators (online sale of goods/provision of services), with ₹20 million revenue threshold.
• 2020–21: U.S. launches Section 301 investigation, finds India’s EL “unreasonable” and “discriminatory”; proposes retaliatory tariffs (later suspended).
• Oct–Nov 2021: OECD announces Pillar One political agreement; U.S.–India joint transitional arrangement: EL to be creditable against future Pillar One liabilities; U.S. terminates proposed tariffs.
• June 2024: U.S. & India extend the transitional compromise while Pillar One text is still being finalized.
• Aug 1, 2024: India withdraws the 2% EL (e-commerce) via Finance (No. 2) Act, 2024.
• Apr 1, 2025: India abolishes the original 6% EL (ads) via Finance Act, 2025—EL fully withdrawn.
• Status of Pillar One: OECD releases the Multilateral Convention (MLC) text (Oct 2023); as of 2025, adoption is pending in several jurisdictions (including the U.S.).

Facts & Figures (What the exam may test)

• Rates: EL 1.0 at 6% on specified online ads (2016–Mar 31, 2025); EL 2.0 at 2% on non-resident e-commerce supplies (Apr 1, 2020–Jul 31, 2024).
• Threshold: EL 2.0 applied above ₹20 million India-sourced revenue/year.
• Collections (indicative): EL revenues reportedly rose to about ₹3,900 crore in FY 2021–22 (vs ~₹2,057 crore prior year).
• Treaty base: India–U.S. DTAA (1989) with articles on Exchange of Information and Mutual Agreement Procedure; FATCA IGA (2015) enables automatic exchange.

Illustrative Examples

• Ad Services (EL 1.0): Payments by an Indian business to a non-resident platform for online advertising were subject to 6% levy (until 31 March 2025). Major affected firms: U.S.-headquartered tech companies selling digital ad space into India.
• Marketplace/Platforms (EL 2.0): Non-resident e-commerce operators selling to Indian users (website/app with Indian IPs) were liable to 2% levy (until 31 July 2024).
• Trade Tension & Truce: USTR’s Section 301 probe deemed India’s EL discriminatory; Nov 24, 2021 compromise made EL creditable against future Pillar One taxes and halted retaliation.

Current Scenario (as on September 6, 2025)

• Equalisation Levy: Fully withdrawn—2% EL removed from Aug 1, 2024; 6% EL abolished from Apr 1, 2025. India’s Income-tax portal tools now reflect non-applicability post these dates.
• Pillar One: OECD’s MLC released (Oct 2023) but not yet in force; political uncertainty in key jurisdictions (notably the U.S.) slows implementation.
• Bilateral Architecture: India–U.S. DTAA and FATCA IGA continue to underpin information exchange, dispute resolution, and tax certainty pending Pillar One’s entry into force.

Impacts (Analysis for Mains)

• On India’s Policy Space: EL provided interim revenue and bargaining power in OECD talks but risked double taxation and trade retaliation. Withdrawal reduces bilateral friction and aligns India with multilateral reform.
• On U.S. Companies: Removal of EL eases a gross-basis cost that disproportionately affected U.S. digital majors (ads & platforms). In the interim (2021–2024), joint statements ensured creditability against future Pillar One liabilities. 
• On Bilateral Trade Relations: Suspension (then termination) of proposed U.S. tariffs de-risked Indian exports and normalized tech-trade ties.
• On Global Tax Governance: The episode demonstrates the limits of unilateral DSTs and the push for a coordinated reallocation of taxing rights (Amount A) to market jurisdictions like India.

Benefits (Post-Withdrawal & Prospective)

• Regulatory Certainty: Businesses avoid overlapping EL, GST, and income-tax exposures; fewer MAP/APA disputes linked to digital intermediation.
• Bilateral Goodwill: Easier investment climate for U.S. tech and Indian digital exporters; better conditions for broader economic cooperation.
• Alignment with Pillar One: India’s position is now squarely aligned with the OECD pathway designed to remove DSTs once Amount A is in force.

What Else Matters (for GS-III/GS-II linkage)

• DTAA & “Make-Available” Tests: The India–U.S. DTAA’s treatment of “fees for included services” (make-available clause) has historically shaped cross-border services taxation and litigation—context for why India pursued EL to tax market-jurisdiction value in the digital age.
• Transparency Backbone: FATCA IGA (2015) and broader AEOI mechanisms continue to strengthen compliance and reduce evasion, complementing treaty-based cooperation.

Conclusion

• The U.S.–India “digital tax” dispute has largely de-escalated with India’s two-step repeal of the Equalisation Levy (Aug 2024 & Apr 2025).
• The center of gravity now lies with Pillar One—a multilateral fix to reallocate taxing rights in the digitalized economy.
• Until it enters into force, the India–U.S. DTAA (with MAP) and the FATCA IGA provide the stability and information-exchange needed to keep disputes contained.

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