The Equalisation Levy: A Shift in India's Tax Landscape

What is the Equalisation Levy?

The Equalisation Levy (EL) is a tax introduced by the Indian government in 2016, aimed at taxing payments made by Indian businesses to non-resident companies for specific digital services. This tax initially imposed a 6% levy on online advertisement services provided by foreign digital firms such as Google, Meta, and Amazon, which was expanded in 2020 to a 2% levy covering a broader range of digital services and e-commerce transactions. The levy applied only when the annual payment exceeded ₹1 lakh to a foreign entity lacking a physical presence in India. However, it is set to be abolished in 2024.

Why Was This Tax Introduced?

The introduction of the Equalisation Levy was driven by the rising dominance of global digital giants offering services in India without any physical presence, causing concerns about tax avoidance. The primary objectives of this levy were:

• Fair taxation of digital services.
• Creating a level playing field for Indian digital companies.
• Generating additional revenue from the growing digital economy.

Why is the Government Now Removing It?

The government plans to abolish the 6% equalisation levy starting April 1, 2025, for several reasons:

• US Tariff Pressure: The US has raised concerns over the EL, deeming it discriminatory against American companies and inconsistent with international tax norms.
• Trade Talks: In light of impending tariff increases on Indian goods, India is under pressure to reconsider its tax policies.
• Avoiding Double Taxation: Although provisions existed to prevent double taxation, India now aims to fully withdraw the tax.
• Signal of Tax Certainty: The removal is expected to create a more predictable taxation environment for foreign investors.

What is the Role of OECD and Global Tax Rules?

The OECD (Organisation for Economic Co-operation and Development) and G20 have been actively working on a global tax deal to tackle tax challenges posed by the digital economy. This agreement proposes a framework where countries can tax multinational companies based on user location rather than just the company's headquarters. Although the US participated in this negotiation, it withdrew from its commitments in early 2025. Given this uncertainty, India is taking unilateral steps to enhance trade relationships and mitigate friction.

How Does This Affect Indian Businesses and Consumers?

• Lower Advertising Costs: Businesses utilizing services from global tech platforms may see reduced tax burdens.
• Better Trade Relations: The removal of the levy could help resolve disputes between the US and India, enhancing bilateral trade.
• Simplified Tax Compliance: Businesses will experience fewer complications when accessing foreign digital services.

What Happens Next?

The amendment to withdraw the levy will be included in the Finance Bill, 2025, which will be debated and passed in Parliament. A sunset clause has been proposed to formally end the 6% levy from April 1, 2025. This change aims to align India’s digital taxation policies with international standards.

Synopsis

India's plan to withdraw the 6% equalisation levy on digital advertisements starting April 1, 2025, is a strategic move to reduce trade tensions with the US and improve its international tax environment. Originally established in 2016 to tax offshore digital firms without a physical presence in India, the levy is being phased out in response to global pressure and the evolution of tax norms within the OECD framework. As the saying goes, “A nation’s growth lies not just in what it earns, but in how fairly it collects and spends.”