Equalisation Levy: Origin, Scope, Issues & Discontinuation

Why in the News?

• As per the amendments proposed in the Finance Act, 2016, the Equalisation Levy (also known as Digital Tax) on online advertisements will not apply from April 1, 2025, onwards. 
• This move is seen as an effort to ease trade tensions, especially with the United States, and align with global tax frameworks.

What is Equalisation Levy?

• Equalisation Levy is a direct tax introduced by the Government of India through the Finance Act, 2016. 
• It is levied on digital transactions, specifically on income earned by non-resident e-commerce companies from Indian users.
• Initially, it applied only to online advertising services, but its scope was expanded under the Finance Act, 2020 to include e-commerce supplies and services.

Why was Equalisation Levy introduced?

To Ensure Fair Competition

• It aims to provide a level playing field between domestic digital companies and foreign digital giants by imposing a tax burden on both.

To Address Tax Avoidance

• Since foreign digital companies often have no physical presence in India, they previously escaped taxation. 
• The levy was introduced to plug this gap.

To Tax Global Digital Giants

• The levy ensures that companies like Google, Facebook, Amazon, which earn significant revenue from India, also contribute to the Indian tax system.

To Boost Revenue

• With a surge in digital transactions, especially post-COVID-19, the Indian government identified digital services as a major source of potential tax revenue.

Applicability of Equalisation Levy

Online Advertisement Services (Still Applicable till March 31, 2025)

• A 6% tax is levied on payments made by Indian businesses to non-resident entities for online advertisements and related services.
• Applies when the total payment exceeds ₹1 lakh in a financial year.

E-commerce Supply and Services (Ended on August 1, 2024)

• A 2% levy was imposed on revenue earned by non-resident e-commerce operators from Indian users.
• Applicable to companies with turnover exceeding ₹2 crore in a financial year.
• This provision ended on August 1, 2024.

Major Concerns

Trade Tensions with the USA

• The United States Trade Representative (USTR) identified Equalisation Levy as a trade barrier, leading to tension between India and the U.S.

Risk of Retaliatory Tariffs

• Other countries could retaliate by imposing duties on Indian exports, which could harm Indian businesses operating abroad.

Double Taxation

• Since the Equalisation Levy is not part of the Income Tax Act, companies cannot claim tax credit under Double Taxation Avoidance Agreements (DTAAs), leading to higher tax burdens.

Compliance Burden

• Small and mid-sized foreign digital firms may find it difficult and expensive to comply, possibly discouraging them from operating in India.

Future of the Equalisation Levy

• India has decided to withdraw the Equalisation Levy on digital advertising services starting April 1, 2025. 
• This move aligns with international negotiations under the OECD framework (Pillar One & Pillar Two) to develop a global digital taxation regime.