India’s tax reforms on BEPS Pillar 1 and Pillar 2

The OECD recently announced the Pillar Two guidelines for discussion, and in December 2021 the model rules for base erosion were tabled. Pillar One aligns taxation rights more closely with local market engagement. Pillar Two establishes a global minimum taxation regime through a series of interlocking set of rules.

India has introduced amendments to tax laws in line with BEPS guidelines, like the Equalisation Levy (EL) which is intended to tax the digital economy. The scope of EL was expanded to tax the gross amount of consideration for the sale of goods or provision of services, irrespective of whether such goods or services are owned or facilitated by a marketplace/ecommerce operator. EL is now subject to an interim agreement with the US to provide credit for taxes, and post-implementation of BEPS, a withdrawal of this interim levy.

Another amendment was the Place of Effective Management (POEM) framework which was introduced to determine the tax payable by a foreign company that, for all purposes, is managed from India. It was concluded that if a foreign company is effectively managed from India, then its global profits will be taxed in India.

Previously, any income accrued in India through a business connection would have been taxed in India. India established a framework to tax the significant economic presence (SEP) of a non-resident. Accordingly, a nonresident will be considered to have a SEP in India if they have transactions of more than INR 20 million in a year. It is irrelevant whether the agreements for the transactions are made in India or not, and SEPbased taxation rules are not only applicable to the digital economy.

India has expressed its support for global harmonisation efforts, and believes that in the long run, through these measures, affected countries will get a fair share of tax revenues. One must wait and see how modifications to treaties take place through the MLI and STTR.

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