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India Plans to Remove the 6% Equalisation Levy

The Indian government has announced its decision to abolish the 6% equalisation levy (EL) on digital advertisements, effective April 1, 2025, as part of the Finance Bill 2025 amendments. The move comes in response to growing trade tensions with the United States, which views the tax as discriminatory against American tech giants like Google, Meta, and Amazon. By scrapping the levy, India aims to strengthen trade relations with the US, align with global tax reforms, and create a more business-friendly environment for foreign companies.

What Was the 6% Equalisation Levy?

Introduced in 2016, the equalisation levy was designed to tax foreign digital service providers generating revenue from Indian businesses.

• Tax Rate: 6% on payments exceeding ₹1 lakh annually to non-resident companies for online ads.

• Purpose: To level the playing field between domestic and foreign companies and boost India’s tax revenues.

• Expansion in 2020: India introduced an additional 2% levy on e-commerce transactions by offshore platforms.

While the tax generated revenue for the government, it also created friction with US authorities, who argued it unfairly targeted American tech firms.

Why Is India Removing the Tax?

India’s decision to abolish the equalisation levy is driven by both economic and diplomatic factors.

1. US Tariff Pressure

• The US Trade Representative (USTR) repeatedly criticized India’s digital tax, claiming it disproportionately impacted American companies.

• To avoid potential US tariffs on Indian exports, India is now scrapping the levy.

2. Global Tax Compliance

• The move aligns with the OECD’s global tax framework, which seeks a unified tax structure for multinational corporations.

• By removing the levy, India signals its commitment to fair trade practices.

3. Boosting Tech Investments

• Scrapping the tax is expected to attract more foreign direct investment (FDI) from tech giants.

• It also makes India a more competitive destination for global technology firms.

The removal of the Google tax will have widespread implications for both foreign tech giants and domestic companies.

For Global Tech Giants

• Lower Tax Liabilities: Google, Meta, Amazon, and other foreign firms will benefit from reduced tax burdens.

• Increased Investments: The removal of the levy could encourage these companies to expand their operations in India.

• More Affordable Ads: Reduced tax costs could lead to lower ad prices for advertisers.For Indian Businesses

• Cost Savings: Indian companies using online ads could benefit from reduced ad expenses.

• Increased Profit Margins: Lower ad costs may improve profitability for startups and SMEs.

• Potential Tax Reforms: The government may introduce alternative tax measures to offset lost revenue.

Reactions from Industry Experts

The proposed tax removal has received mixed reactions from industry experts, trade analysts, and business leaders.

• Finance Minister Pankaj Chaudhary stated that the Finance Bill 2025 amendments aim to streamline tax policies and promote economic growth.

• Tech industry leaders welcomed the decision, calling it a positive step toward reducing operational costs.

• Trade analysts believe this move will enhance India’s trade relations with the US and boost investor confidence.

Global Tax Trends: India Aligns with the OECD Framework

India’s decision follows the global trend of phasing out unilateral digital taxes in favor of the OECD’s global tax deal.

• France, Italy, and the UK have also scrapped their digital service taxes.

• The OECD framework aims to implement fair tax distribution among multinational corporations.

• By complying with this framework, India boosts its global trade credibility.

Key Benefits of Abolishing the Google Tax

The removal of the equalisation levy offers several economic and diplomatic advantages:

• Stronger US-India Trade Relations:

  • Easing US pressure could reduce tariffs on Indian exports.

  • Improved diplomatic ties may lead to greater economic cooperation.

• Increased Foreign Investments:

  • Lower tax burdens attract more tech investments from US firms.

  • Enhanced ease of doing business in India.

• Boost to Digital Marketing:

  • Reduced ad costs could benefit Indian startups and small businesses.

 A Strategic Shift in India’s Tax Policy

The Indian government’s decision to abolish the 6% equalisation levy marks a strategic shift toward enhancing trade relations with the US and aligning with global tax reforms. While the move benefits US tech giants and encourages investments, the government may introduce alternative tax measures to recover lost revenue. This reform is a significant step towards making India a more business-friendly destination for global technology firms.