Context: The Central Government has proposed to abolish the 6% equalisation levy (EL) on online advertisements from April 1, 2025. This move is expected to benefit major US technology firms and ease trade tensions between India and the United States.
Relevance of the Topic: Prelims: Key facts about Equalisation levy.
Equalisation Levy and Rationale behind its Introduction
- Equalisation Levy (digital tax) was introduced in the Union Budget 2016 with the intention of taxing the digital transactions.
- Need:
- Digital companies harness the user generated data, enabling them to earn huge revenues through digital advertisements.
- The companies earn revenue by harnessing the data generated in a particular country, but are not obliged to pay adequate taxes in the source country.
- Thus, Equalisation Levy was introduced to bring such Internet-based companies within the ambit of tax. It aimed to create a level-playing field between resident and non-resident e-commerce companies.
Details about Equalisation Levy
- The equalisation levy of 6% is applicable to the income accruing to a foreign E-commerce company which is not a resident of India.
- Any person or entity in India, which makes a payment exceeding Rs 1 lakh in a financial year to a non-resident technology company (such as Google) for some B2B (Business to Business) transactions, needs to withhold 6% of the gross amount to be paid as equalisation levy.
- Also known as the “Google Tax”, it affected offshore digital giants like Google, Meta, and Amazon.
Reasons for Abolishing Equalisation Levy:
- Trade Tensions with US: The US criticised the levy as “discriminatory and unreasonable”, arguing that it unfairly targeted American tech companies. A year-long investigation by the US deemed digital service taxes in multiple countries (including India) inconsistent with international taxation principles.
- Alignment with Global Tax Reforms: India, the US, and other OECD/G20 members agreed in October 2021 on a two-pillar framework to reform digital economy taxation. India had already removed the 2% EL on e-commerce platforms in 2024, and the latest move aligns with ongoing global consensus efforts.
- Encouraging Foreign Investment: By removing the EL, India signals a more accommodative stance to foreign businesses, possibly attracting greater tech sector investments. Experts believe this could prevent potential US tariff retaliation against Indian exports.
The abolition of the equalisation levy is a significant policy shift that aims to harmonise India’s digital taxation with global frameworks and boost foreign investment in the growing digital economy.