In the wake of the United States’ exit from the landmark Pillar 1 and Pillar 2 tax deals, anchored by the Organisation for Economic Co-operation and Development (OECD), countries around the world, including India, are looking to find alternate ways to formulate a framework for taxing the digital economy.
According to a senior government official, India is likely to chair a meeting of the intergovernmental committee of 24 nations, known as G24, in June to deliberate on the aspect of taxing the digital economy. "The Pillar 1 framework has been put on the back burner by many countries, including India. But we're now trying to look for solutions on how we can tax companies that generate revenue through digital means," the person told Moneycontrol.
The OECD-Pillar 1 rules aim to reallocate taxing rights over a portion of the profits of large and profitable multinational enterprises (MNEs) to market jurisdictions where their customers are located. Specifically, it focuses on reallocating a portion of the residual profits of these companies to jurisdictions where they generate revenue, even if they don't have a physical presence there.
For instance, say a company based in the UK provides cloud services to clients in India, for which it takes a fee, but doesn’t pay any tax to the authorities on that income. The Pillar 1 rules create a framework through which the source country (India in this case) can impose a tax on that income.
Pillar 2, on the other hand, provides for a global minimum tax for MNEs and aims to deter profit shifting by ensuring that these firms maintain a minimum Effective Tax Rate (ETR) of 15 percent across all jurisdictions in which they operate.
The OECD had struck the landmark Pillar 1 and Pillar 2 tax deals, also known as Global Anti-Base Erosion Rules (GLoBE), in 2021. It was signed by about 140 countries. However, post the US’ exit from the framework in January 2025, the future of the two-pillar rules looks bleak, said the official.
"The UN is now working on developing a new framework under which rules will be set up, which will determine how technology companies, operating from different jurisdictions, are taxed in the country where they provide service and generate revenue," another official said. "We’re currently focused on an alternative for Pillar 1 rules, Pillar 2 will take a longer time for negotiation. Through the G24 meetings, the group will present its case to the UN in the later months," said another official.
A working paper of the G24 committee in 2019 had stated that there exists a mismatch between the source of generation of profits and the jurisdiction where they are taxed. "Today, a non-resident (company) can participate in the economic affairs of a jurisdiction without being physically present in the jurisdiction. And a sustained participation of the businesses in the economic life of a country can give rise to profits which are not taxed, given the present international tax rules," it had said.
"The solution, therefore, is to rework the international tax framework regarding nexus and profit allocation rules, and take into account value created within the supply chain, representing the contribution of supply side, along with contribution of demand side factors for determining corporate profits attributable in a tax jurisdiction," the paper had noted.
In fact, India in 2016 had introduced an equalisation Levy, also known as the ‘Google Tax,’ to tax profits generated by non-resident digital companies providing services to Indian firms. Initially, a 6 percent levy was imposed on digital services, but later in 2020, a separate 2 percent levy was introduced on non-resident e-commerce operators providing services to Indian users.
However, following global tax negotiations, India committed to phasing out the Equalisation Levy in line with the ‘Pillar 1’ framework. The 2 percent levy on e-commerce operators was removed in the July 2024 Budget, and the 6 percent was removed via the Finance Bill of 2025-26.
Experts say that India’s leadership in the G24 meeting offers a chance to deliberate on a digital tax framework that prioritises developing nations’ interests, building on its successful unilateral measures adopted in the past, such as Equalisation Levy, which had to be withdrawn subsequently.
"While the approach could be effective in generating revenue and asserting taxing rights, its success hinges on overcoming U.S. opposition, ensuring global coordination, and addressing technical complexities," noted Yeeshu Sehgal, Head of Tax Markets, AKM Global.
The UN General Assembly has set up an inter-governmental committee to negotiate and draft a Framework Convention on International Tax Cooperation, along with a protocol on taxation of cross-border services in a digitalised economy, within a period of about three years. The move is strongly supported by India and other G-24 countries, as well as a very large number of other emerging and developing economies. However, the US has pulled out of the talks and other OECD member countries have raised reservations and disagreements regarding the ongoing work.
"India is an active participant in these talks and the Indian negotiators would be making all efforts towards achieving a solution with the widest possible consensus. Considering the strong support from African and Latin American countries, as well as from China, it should be possible for the committee to come up with an acceptable formulation for taxation of the digital economy," said Akhilesh Ranjan, Advisor, Price Waterhouse & Co LLP.
The G24, established in 1971, is composed of developing countries across Africa, Asia, and Latin America and the Caribbean. The committee aims to coordinate the positions of emerging and developing countries on international monetary and development issues. Its primary goal is to ensure that these countries' interests are adequately represented at the IMF and World Bank.
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