Equalisation levy

Also called: Google tax, Digital services tax · Topic: Taxation: Direct and Indirect Taxes, GST and Global Tax Issues · NCERT: Beyond NCERT

Meaning

The equalisation levy (EL) was India's tax on payments made to non-resident (foreign) digital firms for digital services, such as online advertising and e-commerce sales. It was charged on the gross amount paid, not on profit, and it sat outside the Income-tax Act [3]. It is also called the "Google tax" or a "digital services tax".

Formula: EL = rate × gross amount paid to the non-resident digital firm

Why it matters:

• It was India's own way of taxing foreign tech giants that earn from Indian users but have no office in India.
• India gave it up (the whole levy stopped applying from 1 April 2025) as part of moving to a global, multilateral tax deal [3]. This makes it a live test case of tax sovereignty against global tax coordination.

Explanation

Why it was needed: the "no office, no tax" gap

• Permanent establishment (PE) means a fixed place of business, such as an office, branch or factory. Under tax treaties, a country can tax a foreign firm's business profits only if the firm has a PE there.
• The digital problem:
• A foreign platform can sell ads to Indian businesses and earn from Indian users entirely online.
• It has no office in India, so it has no PE.

• So India could not tax its business profits.

• The OECD/G20 BEPS project (2013–2015) had 15 actions. Action 1 dealt with this exact problem: firms earning from users in a country without having a PE there.

• BEPS (Base Erosion and Profit Shifting) means using gaps between countries' tax rules to move profits to low-tax or no-tax places.

• The "equalisation" idea: an Indian digital firm pays tax in India on what it earns here. A foreign firm earning the same money without an office paid nothing. The levy aimed to equalise the two.

The two parts of the levy

	6% levy	2% levy
On what	Online advertising services	Supplies by e-commerce operators
Introduced by	Finance Act 2016 [3]	Finance Act 2020, for supplies on or after 1 April 2020 [3]
Ended	Whole EL not applicable from 1 April 2025 [3]	Covered only supplies before 1 August 2024 [3]

• Worked example (6% levy): an Indian firm pays ₹1 crore to a foreign platform for online ads.
• EL = 6% × ₹1 crore = ₹6 lakh.

• The Indian payer deducts this amount and deposits it with the government. So the foreign firm gets ₹94 lakh.

• Worked example (2% levy): a foreign e-commerce operator makes ₹1 crore of supplies covered by the levy.

• EL = 2% × ₹1 crore = ₹2 lakh.

Key design features

• Tax on gross amount, not on profit:
• It is simple to collect, because the payment amount is easy to see.

• But the firm pays even if it makes a loss. It works more like a turnover tax.

• Outside the Income-tax Act [3]:

• It was a separate levy, not an income tax.

• Double Taxation Avoidance Agreements (DTAAs) are treaties that stop the same income from being taxed twice, and they deal with taxes on income. Keeping EL outside income tax meant these treaties' PE rules did not block it.

• Unilateral: India imposed it on its own, without a global agreement. This is what caused a trade dispute with the US.

Why it was withdrawn

• US pressure:
• The US opened Section 301 investigations. Section 301 is the US law that allows trade retaliation against foreign practices the US calls "unfair".

• India issued a formal response to the US Section 301 report on the equalisation levy [4].

• The global deal:

• The Two-Pillar Solution (October 2021, about 136+ jurisdictions) offered a multilateral route.
• Pillar One was meant to give market countries, where the users are, a share of taxing rights over large multinationals.

• Countries were expected to drop their own unilateral digital taxes in return.

• Result: the 2% levy ended for supplies from 1 August 2024, and the whole EL ended from 1 April 2025 [3].

In India

• Law: the levy was created through Finance Acts (2016 and 2020), not the Income-tax Act [3]. The Income Tax Department administered it [3].
• Timeline:
• 2016: 6% on online advertising (Finance Act 2016) [3].
• 2018: Significant Economic Presence (SEP) was added to income-tax law as a separate digital-tax tool (Finance Act 2018).
• 2020: 2% on e-commerce operators, for supplies from 1 April 2020 [3].
• 1 August 2024: the 2% levy stopped. It covered only supplies before this date [3].

• 1 April 2025: the EL provisions stopped applying [3].

• Diplomacy: the Government of India, through a PIB release, officially responded to the US Section 301 report on the levy [4].

• India's position: India backed the Two-Pillar deal and gave up the equalisation levy from 1 April 2025 [3].

Don't confuse with

• Significant Economic Presence (SEP): SEP is part of income tax. It treats a foreign firm as taxable in India because of its digital payments or users (thresholds from 2021: ₹2 crore of payments or 3 lakh users). EL was a separate levy outside the Income-tax Act [3]. Also, where a DTAA applies, the treaty's older PE definition usually overrides SEP.
• Pillar One (Amount A): this is a multilateral OECD plan. It reallocates 25% of residual profit (profit above a 10% margin) of multinationals with over €20 billion revenue to market countries. EL was unilateral and taxed gross payments, not profit. Pillar One's convention has stalled.
• Pillar Two (Global minimum tax): this sets a 15% floor on corporate tax for groups with €750 million+ revenue. It stops profits from being moved to low-tax places. It does not give market countries a new right to tax digital firms, which was EL's purpose.
• Transfer pricing: this adjusts the prices of deals between units of the same multinational to the arm's-length price. EL taxed payments by Indian businesses to unrelated foreign digital firms.

Prelims Hooks

• EL was 6% on online advertising (Finance Act 2016) and 2% on e-commerce operators (Finance Act 2020, for supplies from 1 April 2020) [3].
• Trap: EL was charged on the gross amount paid, not on profit, and sat outside the Income-tax Act [3]. It was not an income tax.
• The 2% levy covered only supplies before 1 August 2024. The whole EL was not applicable from 1 April 2025 [3].
• In the 6% levy, the Indian payer deducts the tax. Example: ₹1 crore of ad payments → EL of ₹6 lakh.
• Section 301 is a US trade law. India formally responded to the US Section 301 report on EL [4].
• The BEPS project's Action 1 covered the digital economy. EL and SEP (Finance Act 2018) were India's own answers to it.

Mains Points

• Tax sovereignty vs. global coordination:
• India gave up a working unilateral levy in exchange for a promised multilateral deal.
• But Pillar One has stalled, and the January 2026 Side-by-Side package has diluted Pillar Two for US-headquartered groups [1][2].

• So India's gains are uncertain. This strengthens the case for keeping SEP and for pushing the UN tax convention track (ToR adopted 16 August 2024; negotiating committee meets 2025–2027) [5].

• Trade vs. tax trade-off:

• The US Section 301 investigation showed that a digital tax can lead to trade retaliation [4].

• Withdrawing EL lowered trade tension with a major partner, but it cost India a revenue source from the digital economy.

• Design lessons from a gross-basis levy:

• It is easy to collect and hard to avoid, so it suits a digital economy where profits are easily shifted.
• But a tax on gross payments can be passed on to Indian advertisers and sellers through higher prices, and it hits loss-making firms too.
• A profit-based, treaty-backed approach is fairer but depends on global agreement. This is the balance India must strike when designing future digital taxes.

Related concepts

• Tax haven
• Transfer pricing
• Double Taxation Avoidance Agreement
• Retrospective taxation
• Base Erosion and Profit Shifting
• Significant economic presence
• Pillar One
• Global minimum tax
• Automatic exchange of information

Read more

• International taxation: treaties, profit shifting and the global minimum tax