The government has proposed to withdraw a 6% “equalisation levy” imposed on online advertisements in June 2016, in a move that signalled that its ceding some autonomous ground on taxation of the digital economy, at least for the time being. The step, introduced as one of the 59 amendments proposed in the Finance Bill 2025, follows a similar revocation of a more substantive 2% levy on non-resident e-commerce operators last year.
Once Parliament gives its assent, the change will take effect from April 1.
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.
The decision, experts feel, is aimed at coaxing the US administration to go slow or be lenient on its reciprocal tariff plan, which is to be implemented from April 2. The Donald Trump administration had earlier withdrawn from the OECD-brokered global tax deal that included a two-pillar tax solution to address the taxation issues pertaining to the thriving digital sector.
Even as the hard-won 2021 agreement among nearly 140 nations now looks uncertain, New Delhi has opted for dismantling its interim arrangement in this regard. The equalisation levies, touted as “Google Tax,” were designed for the country to a fair share of taxes from the overseas companies profiting from the Indian market via digital means, without commensurate physical presence.
“Although the 2% levy garnered more criticism from the US, in anticipation of more tariff retaliation by them, the government is trying to show a more accommodative stance, and the removal of 6% levy on online advertising is a step in that direction. However, it remains to be seen if this step, coupled with already ongoing diplomatic measures, would lead to any softening of stance by the US,” AKM Global Tax Partner Amit Maheshwari said.
“This change would now reduce the costs for digital ad consumers, while lowering tax costs for digital advertisement platforms such as Google and Meta,” said Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen.
The amendments also include withdrawal of the corresponding income tax exemption under Section 10(50) to maintain tax neutrality, meaning income previously exempt under the equalisation levy regime will now be taxed under regular income tax provisions.
Last month, Trump ordered his trade chief to revive investigations aimed at imposing tariffs on imports from countries that levy digital service taxes on US technology companies. Though America has no such tax, and only America should be allowed to tax American firms, trading partners hand American companies a bill for something called a digital service tax, the factsheet on the Fair and Reciprocal Plan had said.
The equalisation levy was always an imperfect and symptomatic solution to bring digital transactions under tax, till the time a global and all-pervasive consensus was reached between countries, a tax expert said.
Trump’s negation of the 2021 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.
What is to be seen is whether and how countries could stock to the multiletaral agreement 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, had in Budget FY25 announced withdrawal of the 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 also 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.