Rewriting the Rules of Global Taxation: India at the Crossroads of Sovereignty and Globalisation

- by Inika Dular & Vishwaroop Chatterjee, students at Rajiv Gandhi National University of Law, Punjab. This is the 3rd winning entry of the National Article Writing Competition organized by CBLT.

Introduction

The advent of the digital age has marked its presence in all aspects of the world, including taxation. The Organisation for Economic Co-operation and Development-Group of Twenty (OECD-G20) initiative led the most prominent alteration in international taxation, as Base Erosion and Profit Sharing (BEPS) seeks to establish grounds on which Digital Service providers pay taxes in countries where they operate and where they generate revenue. The multinational corporations are often criticised for avoiding taxes in high corporate tax jurisdictions and paying taxes in low or no-tax jurisdictions.^[1]

OECD’s BEPS initiative has two distinct pillars. The Pillar One deals with relocating taxing rights, which refers to paying taxes regardless of where the company is headquartered. The second pillar seeks to impose a minimum 15% corporate tax worldwide to ensure corporations do not find refuge in low-taxing countries such as Hong Kong or Ireland.^[2]

The BEPS initiative is of paramount contemporary relevance, as India recently abolished its Equalisation Tax (EL). The EL refers to the 6% tax for online digital services, often referred to as the Google tax as well, and the 2% tax for e-commerce platforms.^[3] The article deals with the merits and demerits of the possibility of India joining the BEPS program while addressing questions such as whether India benefits from the BEPS. Can profit shifting be diminished by a global minimum tax policy? And what is the impact of such a program on International Relations, particularly as the world is heading towards a tariff war?

Analysis and Shortcomings of The Equalisation Tax

The EL, also known as the Google tax, was introduced in Section 165 of the Finance Bill, 2016,^[4] with the key objective of ensuring that corporations that generate revenue from digital advertising in India are efficiently taxed even if they do not have a physical presence. The EL is a 6% direct tax collected from corporations on the revenue generated in India. To be eligible for the EL, two prerequisites must be met: The revenue should be generated by a non-resident service provider; in a single year, the service provider should receive over INR 1,00,000. Online advertising, any provision for digital advertising space or facilitation for online advertising, and any other services that were notified would be added to the aforementioned services were the services that were supposed to be covered by the EL when it was first introduced. India expanded the use of EL on April 1, 2020 (Finance Act 2020). The EL was broadened to include a 2% gross income levy on e-commerce services that are facilitated by a non-resident e-commerce operator. 

The tax levied on the e-commerce platforms was met with backlash and criticism for being vague and arbitrary. The EL had shortcomings in providing adequate information regarding the jurisdiction and procedural aspects of it. For example, the status of Indians operating digital services as outsourced for other nations remained unclear and raised issues on the jurisdiction of the services. In the case of DCIT v. Prakash Chandra Mishra,^[5] Income Tax Appellate Tribunal, Jaipur, noted that the service providers may not have control over where the advertisements are used. The service providers are not required to pay EL if the services are provided to citizens of other nations, despite Indian jurisdiction acting as a conduit for the services.

On the other hand, what could attract the EL is when a non-resident of India, while in India’s jurisdiction, purchases something from an Indian Internet Protocol (IP) address, and the product is meant to be delivered abroad. Even a singular transaction such as that may fall under the ambit of EL. This makes it arduous for e-commerce to keep track of all such transactions that overlap jurisdictions and the procedural aspect of it.

Furthermore, the issues of inter-company transactions also remained unclear. If companies perform digital transactions with their related entities through their internal servers, which span two jurisdictions, even then, the company shall be taxed with EL. The provisions only apply to online transactions and not offline ones. For instance, the same inter-company transaction between them made digitally would be taxed, but not if it is offline. This may render the efficacy of the EL, as corporations may just switch to offline transactions when it suits them.^[6] Although transfer pricing laws will apply to offline transactions, moving to offline transactions for digital services could help avoid paying taxes specifically for digital services. Furthermore, multinational corporations may categorise online services as support services or another category with minimal or no taxes. 

Implications of Profit Sharing in a Digital Economy

Profit Shifting refers to the mechanism corporations use to avoid paying taxes in countries with higher corporate tax rates. For instance, they can make inter-jurisdictional deals between their own companies and highlight the company in a high tax jurisdiction, incurring a loss of revenue while disclosing profits in a no or low corporate tax jurisdiction.^[7] To claim interest deductions, they may heavily indebt the subsidiary company in high-tax nations. Additionally, they may frequently transfer funds to low-tax jurisdictions by paying royalties or fees among their subsidiary companies.

Assume that cloud-based services are offered by Company "A," an Indian business. It creates Company "B" in Ireland, which has a corporate tax rate of 12%, and gives it ownership of the intellectual property. They can demonstrate that firm A is losing money and show the increase in spending on the software. In order to avoid paying India's 25% corporate tax and paying 12% in Ireland, Company A now pays large royalties to Company B in Ireland. 

Profit sharing raises serious concerns about its detrimental impacts. For instance, domestic businesses lose a competitive advantage since, in countries with high corporate taxes, overseas corporations may avoid tax responsibility, but smaller domestic companies may not. The revenue that is not collected by the respective tax authorities may have been used by public services to improve the quality of life in those nations. According to reports, India may lose as much as 10 billion dollars annually to profit-sharing loopholes. The number may go as high as 430 billion dollars at a global level. More importantly, when citizens lose belief in the fairness of tax revenue collection, they may be discouraged from starting their own businesses.^[8]

Understanding the OECD Two Pillar Solution

Tech giants such as Google, Meta, and Amazon, for example, derive significant revenues from user bases in countries where they pay minimal or no corporate tax. This disconnect has led to mounting pressure, particularly from developing nations, to reimagine tax rules for a borderless economy. Additionally, aggressive tax planning and base erosion techniques have enabled large Multinational Enterprises (MNEs) to shift profits to jurisdictions that have a low or zero tax rate. This erodes the tax base of those countries where such economic activity occurs, creating more inequities in a global fiscal landscape. The OECD’s two-pillar approach was conceived as a response to such twin challenges: the taxability of the digital economy (Pillar One), and the harmful effects of tax competition (Pillar Two).

Pillar One: Reallocating Taxing Rights

Pillar One aims at reallocating taxing rights over a portion of the residual profits for the largest and most profitable MNEs to market jurisdictions—countries where consumers or users exist, regardless of where the companies get headquartered in or maintain physical operations. Specifically, Pillar One applies to MNEs with total global turnover exceeding €20 billion as well as profitability above 10%.^[9] This scheme aims to assign 25% of residual profits—income past the 10% limit—to local regions using set formulas. The measure is intended to address the concerns of countries, including India, France, and the UK, that have experimented with digital services taxes (DSTs) to catch revenues from untaxed digital activities.^[10]

Pillar One is a shift from the customary transfer pricing rules of arm’s-length principles. It takes note of the impact of user participation, consumer data, and network effects on value creation—aspects central to digital business models. However, its implementation has lately faced certain delays because of political resistance. The United States, especially as of early 2025, has expressed some reluctance to move forward within the agreement, for example.

Pillar Two: Global Minimum Tax

Pillar Two complements the first by addressing profit shifting along with tax competition. It presents a global minimum tax rate of 15% for MNEs earning over €750 million.^[11] The mechanism is enforced through a series of rules:

• Income Inclusion Rule (IIR): The parent entity of an MNE must pay a top-up tax in its home country if its subsidiaries are taxed below the 15% minimum in other jurisdictions.

• Undertaxed Payments Rule (UTPR): Other countries in which the MNE operates now can deny deductions, or impose top-up taxes, to ensure taxation is effective if the jurisdiction of the parent entity does not implement IIR.

• Subject to Tax Rule (STTR): A treaty-based rule mainly benefiting developing countries, which allows for withholding taxes on some related-party payments that are taxed under a nominal rate of 9%.

Unlike Pillar One, Pillar Two has seen adoption to a greater extent. The European Union has legislated for implementation across member states, and countries such as the UK, Japan, South Korea, and Canada are advancing domestic legislation. The US still has not enacted certain rules, although its Global Intangible Low-Taxed Income (GILTI) regime resembles the IIR in structure.

The two-pillar solution is now lauded for its multilateralism and potential for curbing harmful tax practices. It represents one rare moment in global cooperation over taxation, aligning most countries around minimum standards and fairer profit allocation. Pillar Two, in particular, is seen as a step toward ending the “race to the bottom” in corporate tax rates that has persisted for decades.

However, the framework has its fair share of criticism. A major concern is that both pillars unduly favour rich nations having MNE headquarters. For example, even under Pillar One, only a small share of all residual profits is allocated by it to market jurisdictions. Under Pillar Two, taxing rights now rest with residence countries by the IIR, while source countries must rely on the STTR, which is narrower in its scope and requires treaty negotiation. Developing countries have raised certain concerns. The two-pillar structure, even for India, does not reflect economic realities. Their market size, data usage, and labour inputs often play an important role in MNE profitability, yet the benefits of reform may be limited. The removal of unilateral measures such as India’s EL, imposed in 2020 upon foreign e-commerce operators, still reduces their tax autonomy, besides guaranteeing equitable gains from a new regime.

Legally, the OECD framework remains non-binding. It derives force through domestic implementation and integration into bilateral or multilateral treaties. This has created challenges toward uniform adoption. Political commitment varies; whilst the Inclusive Framework has more than 140 signers,^[12] divergences in legislative timetables, national interest, and economic priorities hamper synchronised execution.

India, for its part, has expressed conditional support. To that extent, it has withdrawn its EL in anticipation of Pillar One, but it has not yet legislated either pillar. The Indian government has indicated that participation in the future will depend on benefits accruing to the developing economies. In the interim, India is also championing one parallel effort in order to create a United Nations-based international tax convention, which it argues would be more fully representative and democratic.

The Way Forward: India’s Shift from Equalisation Levy to the OECD Framework

Impact on International Relations

The two-pillar tax framework finds its genesis in the OECD’s BEPS project.^[13] This framework reimagines global tax rules in this era of digitisation, as the first pillar provides for the relocation of taxing rights of large multinational enterprises (MNEs) to market jurisdictions, irrespective of physical presence, whereas Pillar Two proposes a minimum effective corporate tax rate of 15% on large MNEs.

India’s decision to withdraw its EL marks a strategic shift in its tax policy, as it now aligns better with the OECD framework as part of the US-India joint statement of October 2021.^[14] The United States, which houses many of the tech giants targeted by the levy, had previously criticised India’s tax measure. The Office of the US Trade Representative’s (USTR) 2021 National Trade Estimate Report on Foreign Trade Barriers cited India’s EL as discriminatory and an attempt to “single out U.S. digital companies” which is “inconsistent with prevailing principles of international taxation.” in addition to this, the US also proposed, in the same year, an upto-25% tariffs of select Indian imports in retaliation to India’s EL.^[15]

This recent realignment of the Indian digital tax appears as a goodwill gesture to evidence its commitment to this multilateral tax reform. However, concerns over India’s asymmetric concessions have surfaced in light of the US pulling back from the OECD tax agreement.^[16] While India dismantled its unilateral levy, the US’s non-participation disrupts the consensus mechanism, raising concerns about whether developing countries like India will be left in fiscal abeyance.

As far as the international law principles are concerned, the OECD/G20 framework remains soft law as neither of the two pillars is legally binding upon the signatories unless implemented through domestic legislation or treaty obligations. States retain full discretion over domestic tax policy as provided under Article 1 of the UN Charter^[17] and the doctrine of sovereign equality.^[18] Thus, India's earlier digital services taxes, although controversial, were not illegal per se. As the OECD two-pillar tax initiative to standardise international taxation on the digital economy is not legally binding on its signatories, and is merely advisory in nature, India’s abolishment of the EL should not be perceived as a full retreat but a form of conditional cooperation. India continues to reserve its rights and has not yet enacted domestic legislation to implement either pillar.

However, Pillar Two has seen an emerging normativity lately, with over 140 countries agreeing to the Inclusive Framework and several G7 and EU states already rolling out Pillar Two laws.^[19] As a result, a form of customary international law may gradually be forming. This could nudge developing countries to align with global standards. The risk here, however, is that powerful states and blocs could use instruments like trade deals or investment agreements to enforce compliance indirectly, thereby encroaching upon fiscal sovereignty. In recent times, when digital commerce and stateless capital flows are on the rise, global tax systems have somewhat struggled to keep pace with the rapid transformations in how these multinational businesses generate value. The OECD’s two-pillar solution, which is developed under the Inclusive Framework on BEPS, showcases an ambitious attempt to reform international tax frameworks, particularly concerning digital economies. Over 140 countries have so far agreed to associate with this initiative, as this solution seeks to realign taxing rights. This solution ensures a fairer distribution of tax revenues globally, while addressing the problem of corporate profit shifting to low-tax jurisdictions.

Can International Treaties Subdue a Tariff War?

In an era characterised by strengthening tariff wars and passive-aggressive trade tensions, international treaties such as the OECD’s Two Pillars Program offer a cooperative framework, a legally sound way to counter unilateral economic aggression. These agreements facilitate tax transparency, prevent harmful tax practices, as well as strengthen mutual trust between the states, hence contributing to overall global economic stability. Professor Michael Devereux, an expert in public finance, stated, “International cooperation on tax is not merely a matter of fairness, but necessary to the integrity of global markets.”[20]

The U.S.–China trade war exemplified how protectionist tariffs can disrupt global supply chains. Under the Trump administration in particular, economic hostilities escalated. Comparatively, treaties, for example, BEPS and trade pacts, such as the Thorough and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or even the EU–Japan Economic Partnership Agreement (EPA), provide legal certainty, reduce compliance burdens, and also encourage sustainable investment. According to economist Joseph Stiglitz, “Multilateral cooperation leads to better outcomes for all — in trade, tax, as well as development.”

These treaties, by weakening reliance on retaliatory tariffs and reinforcing a rule-based international order, serve the dual purpose of safeguarding business interests and improving public welfare. They do represent legal commitments, in addition to a shared vision concerning global economic resilience.

The World Economy faces a political dilemma, according to Dani Rodrik’s work, because economic integration restricts national sovereignty and democratic governance. Two objectives from the three can exist simultaneously in the world economy. The BEPS Program of the OECD and its comprehensive international efforts fulfil the requirements of this political trilemma through practical solutions for tax controls and global economic governance mechanisms.[21]

BEPS demonstrates a means to minimise economic integration while maintaining complete state power and democratic representation mechanisms. The system allows states to maintain control over their taxation by using soft law instruments that generate consensus-based norms and peer-review relationships. OECD initiatives match Rodrik's interpretation of a "thin version of globalization" that safeguards national policy choices while tackling negative interjection from globalisation.

The BEPS initiative enables nations to secure their tax bases by counteracting aggressive tax planning and harmful preferential regimes, as well as a lack of transparency, without implementing unilateral or protectionist responses. This intergovernmental cooperation reduces the potential strategic use of tax shelters and maintains public control in the development of taxation norms, which Rodrik views as crucial. The initiative demonstrates a modern form of multilateral collaboration that tackles worldwide problems without interfering with state sovereignty.

Conclusion

Perhaps the world's current economic structure is moving toward an eventuality where economic isolation is not possible. To accommodate the same, the OECD framework proposes a much-needed regulatory adjustment on a worldwide scale. The two most crucial issues are addressed by the two-pillar strategy: a global minimum corporate tax of 15% to prevent service providers from participating in profit shifting, and a corporation's tax liability in the jurisdictions where it offers services.

In order to adapt to the shift to digital taxation, India, which just eliminated its EL, may choose to switch to a worldwide tax system. The two-pillar model aids in streamlining India's taxation policy, even though the country may not produce a significant amount of income due to its 25% corporation tax already. Additionally, India's choice to join the BEPS framework will demonstrate its commitment to working together globally, improving international relations and promoting greater confidence among foreign investors.

Both Dani Rodrik's concepts and the BEPS program demonstrate that nations can cooperate without surrendering control.  BEPS prevents large corporations from shifting funds to nations with low tax rates, which is in consonance with efficient tax policy.  According to Rodrik, we must make a decision since we cannot have complete national control, democracy, and globalisation all at once.  BEPS is an innovative method of achieving equilibrium.  It enables nations to remain strong and equitable while cooperating to address global tax issues.

Even though the BEPS framework has many positive adjustments, it still serves to bring about a universal tax revolution by reducing tax autonomy that benefits corporations rather than the average citizen of a jurisdiction. Its disadvantages include jurisdictional confusion and the gap between developed and developing nations. 

[1] PwC, ‘Corporate Income Tax (CIT) Rates’ (Tax summaries. 2024) <https://taxsummaries.pwc.com/quick-charts/corporate-income-tax-cit-rates> accessed 12 April 2025.

[2] Shafer WE and Simmons RS, ‘Social Responsibility, Machiavellianism and Tax Avoidance’ (2008) 21 Accounting, Auditing & Accountability Journal 695.

[3] PwC, ‘Digital Tax Introduced for E-Commerce Operators’ (Tax summaries, 2024) <https://www.pwc.com/mu/en/services/india-desk/india-digital-tax.html> accessed 12 April 2025.

[4] Finance Bill 2016, s 165.

[5]  DCIT v. Prakash Chandra Mishra (TA No. 305/JPR/2022).

[6] Kanabar D, ‘Equalisation Levy Taxing Cross-Border E-Commerce Transactions’ (Dhruva Advisors, February 2021) <https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwi5wvKz99GMAxUGyDgGHd2DLcYQFnoECBgQAw&url=https%3A%2F%2Fwww.dhruvaadvisors.com%2Fwp-content%2Fuploads%2F2023%2F08%2FEqualisation_levy_flyer-1.pdf&usg=AOvVaw3IzPGvjAbICbCzt8OVSGOO&opi=89978449> accessed 12 April 2025.

[7] Brown T, ‘Tax Implications of Corporate Profit Shifting’ (House of Lords Library, 24 January 2025) <https://lordslibrary.parliament.uk/tax-implications-of-corporate-profit-shifting/>  accessed 12 April 2025.

[8]‘India Loses over Rs 70,000 Crore Annually in Tax Evasions: Study’ (Deccan Herald, 21 November 2020) <https://www.deccanherald.com/india/india-loses-over-rs-70000-crore-annually-in-tax-evasions-study-918294.html>  accessed 12 April 2025.

[9] Organisation for Economic Co-operation and Development (OECD), Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (8 October 2021) <https://www.oecd.org/content/dam/oecd/en/topics/policy-issues/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.pdf> accessed 15 April 2025.

[10] VATCalc, 'Digital Services Taxes DST – Global Tracker' (VATCalc, March 2025) <https://www.vatcalc.com/global/digital-services-taxes-dst-global-tracker/> accessed 15 April 2025.​

[11] ​​Organisation for Economic Co-operation and Development (OECD), Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (8 October 2021) <https://www.oecd.org/content/dam/oecd/en/topics/policy-issues/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.pdf> accessed 15 April 2025.

[12] PricewaterhouseCoopers, 'OECD Pillar Two Country Tracker' (PwC, 17 March 2025) <https://www.pwc.com/gx/en/services/tax/pillar-two-readiness/country-tracker.html> accessed 9 April 2025.​

[13] Organisation for Economic Co-operation and Development, 'Base Erosion and Profit Shifting (BEPS)' (OECD) <https://www.oecd.org/en/topics/policy-issues/base-erosion-and-profit-shifting-beps.html> accessed 9 April 2025.​

[14] Ministry of Finance, 'India and USA agree on a transitional approach on Equalisation Levy 2020' (Press Information Bureau, 24 November 2021) <https://pib.gov.in/PressReleasePage.aspx?PRID=1774692> accessed 9 April 2025.​

[15]​ Office of the United States Trade Representative, '2021 National Trade Estimate Report on Foreign Trade Barriers' (2021) <https://ustr.gov/sites/default/files/files/reports/2021/2021NTE.pdf> p. 268.​

[16] The White House, 'The Organization for Economic Co-operation and Development (OECD) Global Tax Deal (Global Tax Deal)' (Presidential Memorandum, 20 January 2025) <https://www.whitehouse.gov/presidential-actions/2025/01/the-organization-for-economic-co-operation-and-development-oecd-global-tax-deal-global-tax-deal/> accessed 9 April 2025.​

[17] UN Charter Art. 1.

[18] Hans Kelsen, 'The Principle of Sovereign Equality of States as a Basis for International Organization' (1944) 53 Yale LJ 207.​

[19] Alex Mengden, 'Pillar Two Implementation in Europe, 2024' (Tax Foundation, 5 November 2024) <https://taxfoundation.org/data/all/eu/pillar-two-implementation-europe/> accessed 9 April 2025.​

[20]  Devereux MP, Griffith R and Klemm A, ‘Corporate Income Tax Reforms and International Tax Competition’ (2002) 17 Economic Policy 449.

[21]  Rodrik D, ‘Feasible Globalizations’ [2002] SSRN Electronic Journal.