Equalisation Levy: Journey From Inception to Abolition & New Tax Regime

Introduction: The Dawn and Dusk of a Pioneering Tax

The Equalisation Levy (EL), often colloquially termed the “Google Tax,” represented India’s pioneering unilateral effort to tax the burgeoning digital economy. Introduced via the Finance Act of 2016, its objective was clear: to create a level playing field between domestic and non-resident digital enterprises by taxing revenues earned by foreign entities from India without a physical presence. The levy was a direct response to the challenges identified in the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan 1, tackling complex issues of nexus, income characterization, and data valuation in the digital age.

However, after an eight-year run, this landmark levy has been phased out. As of April 1, 2025, the Equalisation Levy framework is fully discontinued. This article provides a comprehensive overview of the EL’s journey—from its inception and expansion to its recent abolition—and analyzes the new tax landscape under the Significant Economic Presence (SEP) regime that replaces it.

The Genesis and Expansion of the Equalisation Levy

Phase 1: Equalisation Levy 1.0 (2016)

Initially, the EL targeted the lucrative online advertising market. A levy of 6% was imposed on the gross consideration received by non-resident entities for providing online advertising space or any related services. This was aimed at companies like Google and Meta, which garnered significant revenue from Indian users but were not liable for income tax in India due to the absence of a Permanent Establishment (PE). The levy was structured as a withholding tax, to be deducted by the Indian business making the payment if the aggregate annual payment to a single non-resident exceeded ₹1 lakh.

Phase 2: Equalisation Levy 2.0 (2020)

The Finance Act, 2020, significantly expanded the EL’s ambit. This “EL 2.0” introduced a 2% levy on the gross consideration received by non-resident e-commerce operators from the online sale of goods or provision of services to Indian users. Its scope was broad, covering:

• Online sale of goods owned by the e-commerce operator.
• Online provision of services by the e-commerce operator.
• Facilitation of online sale of goods or provision of services.
• Sale of advertisements targeting Indian residents.
• Sale of data collected from Indian residents or users with an Indian IP address.

This applied to non-resident e-commerce operators with annual revenues from India exceeding ₹2 crore. Unlike its predecessor, this levy was to be directly deposited by the non-resident operator.

Scope, Applicability, and Key Exclusions

The EL was designed to apply exclusively to non-residents who did not have a PE in India. Key features of its applicability included:

• Extraterritorial Reach: It applied even if the transaction occurred outside India, as long as it involved Indian customers, IP addresses, or targeted advertising towards India.
• Gross-Basis Taxation: The levy was calculated on gross revenue, not net profit, making it a form of turnover tax. This was a point of contention as it didn’t account for the costs incurred to earn the revenue.
• Key Exemptions: The levy was not applicable if:
  • The non-resident had a PE in India and the income was connected to it.
  • The annual payment/receipt was below the specified thresholds (₹1 lakh for ads, ₹2 crore for e-commerce).
  • The income was already taxable as royalty or fees for technical services under the Income Tax Act, 1961.
• Interaction with Tax Treaties: Crucially, the EL was introduced as a separate levy outside the Income Tax Act. Consequently, it was not covered under India’s Double Taxation Avoidance Agreements (DTAAs), preventing non-residents from claiming a tax credit in their home countries and potentially leading to double taxation.

The Abolition: Aligning with Global Consensus

In a significant policy shift, the Government of India has phased out the Equalisation Levy. The 2% levy on e-commerce transactions was abolished effective August 1, 2024, and the 6% levy on online advertising was discontinued from April 1, 2025. This strategic rollback was driven by several factors:

1. Alignment with OECD/G20 Framework: India is a key member of the OECD/G20 Inclusive Framework, which has developed a two-pillar solution to address global tax challenges. The abolition of the EL signals India’s commitment to implementing this multilateral consensus, particularly Pillar One, which deals with the reallocation of taxing rights.
2. Easing Trade Tensions: The EL was a source of friction with several countries, notably the United States. The U.S. Trade Representative (USTR) had initiated Section 301 investigations, deeming the tax discriminatory against American tech giants and threatening retaliatory tariffs. Repealing the levy helps mitigate these trade disputes.
3. Reducing Compliance Burden: The broad and sometimes ambiguous scope of the EL created significant compliance challenges for non-resident companies, particularly regarding the tracking of Indian IP addresses and the nuances of “facilitation” of sales.

While the move is expected to cause a short-term revenue loss of over ₹3,000 crore, it is a forward-looking step towards a more stable and predictable international tax environment.

Life After EL: The Era of Significant Economic Presence (SEP)

With the repeal of the EL, the corresponding income exemption under Section 10(50) of the Income Tax Act has also been withdrawn. This paves the way for the taxation of non-residents under the Significant Economic Presence (SEP) provisions. Introduced in 2018 and fully operationalized in 2021, the SEP regime creates a taxable nexus for non-residents in India even without a physical presence.

A non-resident is deemed to have a SEP in India if it meets either of the following conditions:

• Revenue Threshold: Transactions in respect of any goods, services, or property with any person in India, including the provision of downloading data or software, if the aggregate of payments arising from such transaction(s) during the previous year exceeds ₹2 crore.
• User Threshold: Systematic and continuous soliciting of business activities or engagement in interaction with 3 lakh or more users in India.

Implications of the Shift from EL to SEP:

This transition marks a fundamental shift from a simple gross-basis turnover tax to a more complex net-basis income tax. While the tax rate under SEP is significantly higher, it applies to profits, not revenue, which may provide relief to low-margin businesses. However, the challenge now shifts to the robust determination and attribution of profits to the Indian SEP, a notoriously contentious area in international taxation.

Practical Guidance for Non-Resident Businesses

In this new regime, non-resident digital businesses must recalibrate their India strategy. Key action points include:

1. Assess SEP Triggers: Conduct a thorough analysis to determine if the revenue or user thresholds for SEP are met. This requires careful tracking of India-sourced revenue and user engagement metrics.
2. Profit Attribution Exercise: If SEP is triggered, undertake a comprehensive exercise to determine the profits attributable to Indian operations. This may require sophisticated functional analysis and transfer pricing documentation.
3. Rethink Pricing Models: The tax incidence has shifted from a 2%/6% gross levy to a ~40% net income tax. This may necessitate a review of pricing models for services offered to Indian customers.
4. Evaluate Treaty Eligibility: For entities resident in countries with a DTAA with India, evaluate whether treaty benefits can be claimed to avoid SEP taxation. This will depend on the definition of a PE in the specific treaty.
5. Ensure TDS Compliance: Indian payers making payments to non-residents with a SEP must now comply with withholding tax obligations under Section 195 of the Income Tax Act.

Conclusion: A New Chapter in India’s Digital Tax Journey

The Equalisation Levy was a bold and necessary interim measure that positioned India at the forefront of the global debate on digital taxation. Its abolition is not a retreat but an evolution, reflecting a mature shift towards embracing a multilateral, consensus-based solution. The new era of the SEP regime, while aligned with international norms, brings its own set of complexities, particularly around profit attribution. As India and the world move closer to implementing the OECD’s two-pillar solution, businesses must remain agile, proactively manage their tax positions, and stay abreast of the rapidly evolving regulatory landscape.

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Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Readers are advised to consult with their professional advisors before making any decisions based on the information provided.