(Image source from: Businesstoday.in)
In a strategic decision likely to favor major American tech firms while addressing U.S. apprehensions about India's high tariff status, the Central government has suggested eliminating the equalization levy on online advertisements as part of the amendments to the Finance Bill, 2025. Analysts perceive this action by the Indian authorities as an effort to reduce trade friction with the United States, signaling New Delhi's intention to adopt a more conciliatory approach as discussions about a prospective trade agreement progress. An equalization levy serves to ‘equalize’ tax liabilities between a domestic e-commerce entity and a foreign e-commerce company. Under the proposed 35 amendments to the Finance Bill, 2025, the government aims to abolish the 6 percent equalization levy (EL) imposed on digital advertisements, effective April 1, 2025. This levy, which has been applicable since 2016 on payments exceeding 100,000 rupees annually to foreign service providers for online ads, seeks to equalize tax obligations.
Commonly referred to as the "Google tax," this levy impacts the online advertising offerings from foreign companies like Google, Meta, and Amazon, compelling them to withhold and pay this tax to the government. Though the 6 percent tax has been in place since 2016, in 2020, India introduced a 2 percent equalization levy targeting e-commerce platforms providing digital services within India. This tax faced backlash from the United States, which labeled it “discriminatory and unreasonable,” contending that domestic firms were not subjected to similar charges. Consequently, India repealed the 2 percent EL in 2024, although the 6 percent charge persisted. In October 2021, India, the United States, along with other members of the OECD/G20 Inclusive Framework, reached an agreement to develop a two-pillar solution addressing the taxation complexities arising from the rapid expansion of the digital economy, aiming to establish a fair and cohesive global system.
“The government had already eliminated the 2 percent EL on e-commerce last year. While this levy attracted considerable criticism from the U.S., the Indian government seems to be taking measures to display a more accommodating position in the face of potential tariff retaliation from the U.S., and the removal of the 6 percent EL on online advertisements aligns with that strategy. Nevertheless, it remains uncertain if this action, combined with ongoing diplomatic efforts, will lead to a change in the U.S. stance,” commented Amit Maheshwari, a tax partner at AKM Global.
The United States previously carried out an extensive investigation lasting a year, which commenced in June 2020, focusing on digital services taxes. This inquiry highlighted that such taxes negatively impact technology firms such as Apple, Amazon, Google, and Facebook. The U.S. maintained that the digital services taxes implemented by countries including Austria, India, Italy, Spain, Turkey, and the United Kingdom were discriminatory against American digital enterprises and did not align with international tax standards, thereby placing an undue burden on U.S. businesses.
The equalization levy has long been recognized as an inadequate and symptomatic measure aimed at taxing digital transactions until a comprehensive agreement could be achieved among nations. Alongside the equalization levy, India also incorporated the idea of Significant Economic Presence (SEP) into its domestic legislation, aimed at targeting foreign firms with a substantial digital footprint in India. The government's decision to suggest the complete removal of the equalization levy represents a positive development, as it not only provides clarity for taxpayers but also addresses concerns raised by international partners, such as the United States, regarding the unilateral nature of this tax.
