Nearly a decade after the start of a multilaterally coordinated effort to attune the global tax systems to the digitised world of business, and despite a hard-won 2021 agreement among nearly 140 nations to put into effect the requisite new rules, things have come to a pass. The Trump administration has withdrawn from the OECD-brokered global tax deal signed during the Biden regime. To be sure, the much-touted two-pillar tax solution is designed to address the issues arising out of the current global situation, where companies gain market access with minimal or no physical business in the jurisdictions concerned. The global body had taken the G20 nations on board before it made a pioneering move in 2015 to address the tax challenges of the digital economy, under its Base Erosion and Profit Shifting (BEPS) project. That in fact was meant to mark a shift from the century-old approach to international taxation, under a network of bilateral tax treaties, and built around traditional business, relying primarily on physical presence.

The US move effectively means that the world’s largest economy that is home to the Big Tech, has for all practical purposes forsaken the OECD’s two-pillar solution. Trump’s order is in keeping with his administration’s patently inward-looking “America first” policy. Trump’s negation of the tax deal has India and many other countries in a cleft stick, and raises the spectre of a flurry of moves and counter-moves by the principal countries on the world economic stage. The irony is this could be to the collective detriment of all of them.

It remains to be seen whether and how countries would defer to the 2021 tax deal as they respond to the US move, or take unilateral measures to underscore their tax rights. India, which was initially reluctant to embrace the Pillar-one solution for taxing the digital economy, and introduced an equalisation levies (EL) in 2016 and 2020 to ensure overseas digital firms making profits in India pay their fair share of taxes here, had in Budget FY25 announced withdrawal of the more substantive 2% levy on non-resident e-commerce operators. This showed the country’s willingness to move to the multilateral Pillar-one framework for taxing overseas digital players. The revocation of the levy from August last year actually followed a US move to impose “retaliatory punitive tariffs” on India and the European Union, and an agreement reached with the US on a transitional approach to EL. Since the 2% levy was scrapped, India has been using a nexus rule (significant economic presence) to tax non-resident e-commerce operators, with most of them enjoying treaty benefits.

Pillar two may not have much revenue implications for India in the immediate future, given the nature of outbound investments. However, with its vast consumer market and wide digital user base, the prospects are much higher for the country from gaining legitimate taxing rights on digital service providers from abroad. Now that the US withdrawal has cast major uncertainties on the OECD tax deal, India will have to go back to the drawing board again to devise a new effective strategy. While the choice of reintroducing the levy on e-commerce firms is there, that would not only undermine the global framework but also lead to retaliation by the US. A tax on India’s services exports by the US, by including these in the definition of digital business, is what could hit India where it hurts.