31st March 2025 (31 Topics)
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Equalisation Levy
Context
In a significant policy shift, the Indian government has proposed to abolish the Equalisation Levy (EL) on online advertisements as part of amendments to the Finance Bill, 2025. This move is expected to benefit American tech giants like Google, Meta, and Amazon, and also ease trade tensions with the United States, which has criticized India’s digital taxation policies.
What is the Equalisation Levy (EL)?
- Introduced in 2016, the 6% equalisation levy was imposed on payments exceeding ?1 lakh per year made to non-resident service providers for online advertisements.
- It aimed to create a level playing field between Indian digital companies and foreign tech giants that earned revenue from India without paying direct taxes.
- This tax is often referred to as the “Google Tax” because it largely affected foreign digital advertising platforms.
Why is India Removing the Levy?
- Trade Diplomacy with the US: In 2020, India imposed an additional 2% equalisation levy on e-commerce platforms providing services in India, which faced strong opposition from the United States.
- The US Trade Representative (USTR) argued that India's digital tax discriminated against American companies and threatened retaliatory tariffs.
- To ease tensions, India removed the 2% EL in 2024 and is now proposing to remove the 6% EL on online ads from April 1, 2025.
- OECD Global Tax Framework: India, along with the US and other OECD/G20 nations, is working on a global digital taxation framework to replace unilateral taxes like the equalisation levy.
- Significant Economic Presence (SEP) Framework: India has introduced the Significant Economic Presence (SEP) concept, which allows taxation of foreign companies with a substantial digital footprint in India. This makes the equalisation levy redundant as SEP can address tax challenges more effectively.
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