Abolition of Equalisation Levy on Online Advertisements

  • 26 Mar 2025

In News:

The Indian government has proposed to abolish the Equalisation Levy (digital tax) on online advertisements, effective April 1, 2025. This move is set to benefit digital advertisers on platforms like Google, Meta (formerly Facebook), and X (formerly Twitter), reducing their tax burden.

Overview of Equalisation Levy

  • Introduction:
    • The Equalisation Levy was introduced by the Finance Act of 2016. Its primary objective was to tax foreign digital service providers (such as Google, Meta, etc.) for income generated from digital transactions in India, ensuring these businesses contribute fairly to India’s tax system, despite having no physical presence.
  • Coverage:
    • Initially, the levy applied to online advertising services, imposing a 6% tax on payments made to non-resident providers. This was later expanded in 2020 to include e-commerce transactions, imposing a 2% levy on revenues from e-commerce operations. The e-commerce levy was abolished in August 2024.
  • Conditions: The levy is applicable if:
    • The payment is made to a non-resident service provider.
    • The annual payment to the service provider exceeds Rs. 1 lakh in a financial year.
  • Exclusions:
    • If the non-resident service provider has a permanent office in India or if the income qualifies as royalties or technical services fees, it is not subject to the levy.
    • Transactions under Rs. 1 lakh or involving exempt income under Section 10(50) are not taxed under the Equalisation Levy.

Key Reasons for Abolishing the Equalisation Levy

  • Improved Tax Relations with the US: The levy has been a point of contention, particularly with the US, which threatened retaliatory tariffs. The move to abolish the 6% levy is seen as a step to improve trade relations and avoid escalation of trade disputes.
  • Simplification of Tax Laws: Experts believe that removing the levy aligns with India’s broader efforts to simplify and streamline its tax legislation, making it easier for digital service providers to operate within the country.
  • Addressing Global Concerns: The proposal to remove the levy is also in response to concerns raised by partner nations, like the US, about the unilateral nature of the tax. This step aims to reduce friction and maintain smoother diplomatic and trade ties.

Implications of the Abolition of the Equalisation Levy

  • Reduced Costs for Advertisers: The removal of the 6% tax will lower the financial burden on advertisers in India who use platforms like Google, Meta, and X. This is expected to encourage more investment in digital advertising and benefit the broader digital economy.
  • Enhanced Competitiveness: By removing the levy, India aims to create a more level playing field for both domestic and foreign companies involved in digital advertising, fostering fairer competition.
  • Impact on International Relations: The decision could help defuse trade tensions, particularly with the US, and might avoid reciprocal tariffs that could affect Indian companies operating internationally.
  • Tax Revenue Implications: While the abolition may result in short-term revenue loss from the digital services sector, it is anticipated that the long-term benefits from increased digital advertising spending and improved international relations will outweigh the initial loss.

Future Outlook

  • Monitoring and Adjustments: While the government has moved to abolish the Equalisation Levy, experts suggest that further monitoring and analysis of digital taxation might be required, especially considering global trends and the evolving digital economy. The impact of this abolition on India’s digital tax landscape will need to be observed closely.
  • Diplomatic Measures: Along with the abolition of the levy, the government continues to pursue diplomatic efforts to ensure fair trade practices and avoid potential retaliatory measures by foreign nations.