Equalisation Levy

The Equalisation Levy is a direct tax introduced by India through the Finance Act, 2016, to capture revenue from non-resident enterprises that earn income from Indian consumers without maintaining a taxable physical presence in the country. Its legal basis lies in Chapter VIII of the Finance Act, 2016, which is a self-contained code standing outside the Income-tax Act, 1961—a deliberate drafting choice that placed the levy beyond the reach of India's network of bilateral double-taxation avoidance agreements (DTAAs), which apply only to taxes covered by the Income-tax Act. The levy drew conceptual inspiration from Action 1 of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, whose 2015 final report on the tax challenges of the digital economy expressly listed an "equalisation levy" among the options states might adopt unilaterally. India's Committee on Taxation of E-Commerce, constituted by the Central Board of Direct Taxes, recommended the measure in its February 2016 report.

The original 2016 levy operates through a withholding mechanism. A levy of 6 percent is charged on the gross consideration paid by an Indian resident carrying on business or profession, or by a non-resident having a permanent establishment in India, to a non-resident service provider for "specified services"—defined as online advertisement, provision of digital advertising space, and any facility or service for the purpose of online advertisement. The payer, not the foreign recipient, bears the compliance burden: it must deduct the levy at source, deposit it with the government by the seventh day of the following month, and file an annual statement in Form 1. A de minimis threshold exempts aggregate annual payments to a single non-resident of one lakh rupees or less. Section 40(a)(ib) of the Income-tax Act disallows the deduction of the underlying expense if the payer fails to remit the levy, creating a strong enforcement incentive.

The Finance Act, 2020, sharply expanded the regime by inserting a second charge: a 2 percent levy on the consideration received by a non-resident "e-commerce operator" from e-commerce supply or services made, provided, or facilitated to persons resident in India, to persons buying using an Indian IP address, or in respect of the sale of advertising targeting Indian users and the sale of data collected from Indian residents. Unlike the 2016 advertising levy, the 2020 e-commerce levy is collected directly from the foreign operator rather than withheld by the payer, and it applies only to operators with annual receipts of two crore rupees or more. The 2020 measure took effect on 1 April 2020 with no advance consultation, surprising affected firms. To prevent double taxation, Section 10(50) of the Income-tax Act exempts income already subjected to the equalisation levy from income tax.

Contemporary application centred on large American technology firms. The 6 percent advertising levy directly affected Google, Meta (Facebook), and similar platforms selling advertising to Indian businesses, while the 2 percent e-commerce levy swept in Amazon, Netflix, Apple, and a broad universe of cross-border digital sellers. The Office of the United States Trade Representative (USTR) initiated a Section 301 investigation into India's digital levy in June 2020 and concluded in January 2021 that it discriminated against U.S. companies; the USTR announced retaliatory tariffs in March 2021 but suspended them pending multilateral negotiations under the OECD/G20 Inclusive Framework. The Ministry of Finance and the Central Board of Direct Taxes administered the levy throughout this period.

The Equalisation Levy is distinct from several adjacent instruments. It is not the Goods and Services Tax (GST), an indirect consumption tax levied on supply under a separate constitutional head; nor is it the Integrated GST on Online Information and Database Access or Retrieval (OIDAR) services, which taxes the supply rather than the income. It also differs from a conventional digital services tax (DST) of the European type only in nomenclature and design particulars—India deliberately called it a "levy" rather than an "income tax" to insulate it from treaty obligations and from the non-discrimination and permanent-establishment articles that constrain income taxation. It is likewise separate from the Significant Economic Presence (SEP) nexus rule, inserted into Section 9 of the Income-tax Act, which expands what constitutes a business connection for income-tax purposes.

The levy became a casualty of multilateral reform. Under the October 2021 OECD/G20 two-pillar agreement, signatory states committed to withdraw unilateral digital taxes once Pillar One—reallocating taxing rights over the largest multinationals—entered force. India accordingly abolished the 2 percent e-commerce levy with effect from 1 August 2024 through the Finance Act, 2024, and removed the 6 percent advertising levy with effect from 1 April 2025 via the Finance (No. 2) Act, 2024. The repeal reflected both the slow progress of Pillar One ratification and India's negotiating posture with the United States, even as questions remained about revenue substitution if the multilateral solution stalled.

For the working practitioner, the Equalisation Levy is a textbook case of unilateral tax assertion over the digital economy and a recurring subject in UPSC General Studies Paper III on economy and taxation. It illustrates how a state can use careful statutory drafting to circumvent treaty constraints, how source-based taxation collides with residence-based norms in a dematerialised economy, and how unilateral measures invite trade retaliation and accelerate multilateral bargaining. Its rise and repeal between 2016 and 2025 map the entire arc of the international debate over taxing digital giants, making it essential reference material for tax policy desks, trade negotiators, and economic affairs analysts.