Equalisation Levy & Digital Services Tax: When Foreign Tech Companies Owe India Tax

The Rise and Fall of India's Equalisation Levy

India was among the first countries globally to impose a unilateral digital services tax when it introduced the Equalisation Levy (EL) through Chapter VIII of the Finance Act, 2016. The levy was designed to capture tax revenue from foreign digital companies like Google, Meta, and Amazon that earned significant revenue from Indian customers without maintaining a taxable physical presence — a permanent establishment — in India.

Between 2016 and 2025, the equalisation levy went through three distinct phases: the original 6% levy on online advertising (2016), the expanded 2% levy on e-commerce operators (2020), and the complete abolition of both levies (2024-2025). Understanding this timeline is critical for foreign tech companies assessing their historical and ongoing India tax obligations.

Phase 1: The 6% Equalisation Levy on Online Advertising (2016-2025)

Scope and Mechanism

The original equalisation levy, effective June 1, 2016, imposed a 6% tax on payments made by Indian residents or Indian permanent establishments to non-resident companies for the following specified services:

• Online advertising
• Provision of digital advertising space
• Any other service or facility notified by the government in connection with online advertising

The levy applied only when the annual aggregate payment to a single non-resident exceeded INR 1 lakh (approximately USD 1,200). The tax was collected at source — meaning the Indian business making the payment was responsible for deducting 6% and depositing it with the government.

Who Was Affected

The 6% levy primarily impacted:

• Google: Through Google Ads payments made by Indian advertisers
• Meta (Facebook/Instagram): Through social media advertising purchases by Indian businesses
• LinkedIn, Twitter/X: Through advertising revenue from Indian customers
• Amazon: Through sponsored advertising on its India marketplace

Indian businesses making these payments bore the compliance burden of deducting the levy at source, filing quarterly returns (Form 1), and issuing annual statements (Form 3) to the non-resident payee.

Revenue Collection

The equalisation levy generated significant revenue for India: approximately INR 3,500 crore (USD 420 million) in FY 2023-24 and INR 3,300 crore (USD 396 million) in FY 2024-25. This revenue came entirely from India's digital advertising market, which was valued at over INR 50,000 crore by 2024.

Abolition

The Finance Act, 2025, signed by the President on March 29, 2025, abolished the 6% equalisation levy on online advertising services provided by non-resident entities, effective April 1, 2025. This removal is expected to result in a revenue loss of over INR 3,000 crore in FY 2025-26.

Phase 2: The 2% Equalisation Levy on E-Commerce (2020-2024)

Expanded Scope

The Finance Act, 2020, significantly expanded the equalisation levy framework by introducing a 2% levy on revenue earned by foreign e-commerce operators from Indian users. This was enacted during the COVID-19 pandemic and applied to a much broader range of digital services:

• Online sale of goods by foreign e-commerce operators
• Online provision of services by foreign entities
• Software-as-a-Service (SaaS) platforms
• Cloud computing services
• Online education services
• E-commerce marketplace operations
• Data hosting and storage services

The 2% levy applied when the foreign e-commerce operator's annual revenue from Indian operations exceeded INR 2 crore (approximately USD 240,000). Unlike the 6% levy, the 2% levy was the direct obligation of the foreign company, not the Indian payor.

International Backlash

The 2% levy drew significant opposition from the United States government, which viewed it as discriminatory against American tech companies. The Office of the US Trade Representative (USTR) investigated India's equalisation levy under Section 301 of the Trade Act of 1974 and determined that it discriminated against US companies. The US threatened retaliatory tariffs on Indian exports, creating trade tensions that influenced India's eventual decision to repeal the levy.

Abolition

In the Union Budget 2024 speech on July 23, 2024, Finance Minister Nirmala Sitharaman announced the abolition of the 2% equalisation levy, effective August 1, 2024. She explicitly linked this decision to India's commitment to the OECD's Pillar One framework, which requires member countries to withdraw unilateral digital services taxes in exchange for a coordinated global approach to taxing rights allocation.

Current Tax Landscape for Foreign Tech Companies (Post-April 2025)

With both equalisation levies abolished, foreign tech companies might assume they have no India tax exposure without a physical presence. That assumption is incorrect. India's tax framework still provides multiple mechanisms to tax non-resident digital businesses:

Significant Economic Presence (SEP)

The Income Tax Act defines "Significant Economic Presence" (SEP) as a basis for establishing business connection — and therefore taxability — in India. The CBDT has notified the following thresholds:

• Revenue threshold: INR 2 crore (approximately USD 240,000) in transactions with Indian users in a financial year
• User threshold: 300,000 users in India in a financial year

If either threshold is exceeded, the foreign company is deemed to have a business connection in India, making its attributable income taxable under the Income Tax Act. The new Income Tax Act, 2025 (effective FY 2026-27) retains these SEP provisions.

However, SEP-based taxation is currently limited by India's Double Taxation Avoidance Agreements (DTAAs). Most DTAAs do not include SEP as a basis for taxation, meaning that a foreign company resident in a treaty country can claim DTAA protection to avoid SEP-based tax liability — at least until DTAAs are renegotiated to include digital PE concepts.

Withholding Tax on Royalties and Fees for Technical Services

Foreign tech companies receiving payments from India for software licences, SaaS subscriptions, technical consulting, or technology transfer may face withholding tax obligations under Section 195 of the Income Tax Act.

The domestic withholding rate for royalties and fees for technical services (FTS) paid to non-residents is 20% under Section 115A (raised from 10% by the Finance Act 2023), plus applicable surcharge and cess. However, DTAA rates often provide lower rates:

The critical question for SaaS companies is whether payments for cloud-based software access constitute "royalties" under the applicable DTAA. Indian tax authorities have historically taken an expansive view, treating many software payments as royalties, though judicial precedents — including the Supreme Court's ruling in Engineering Analysis Centre of Excellence vs CIT (2021) — have established that payments for copyrighted software (as opposed to copyright itself) are not royalties. This remains a contested area of law.

Permanent Establishment Risk

Foreign tech companies with employees, servers, or dependent agents in India may have a permanent establishment risk. A landmark Supreme Court ruling in July 2025 established that operations of a non-resident in India, even without owning physical premises, could give rise to a fixed place PE under bilateral tax treaties. This is particularly relevant for tech companies with:

• Remote employees working from India
• Sales or support staff based in India
• Data centre infrastructure or co-located servers
• Exclusive dependent agents or distributors

Companies with PE exposure face the full 35% corporate tax rate on income attributable to the PE, plus surcharge and cess. For a deeper analysis, see our guide on PE risk from remote employees in India.

How India Compares: Global Digital Tax Landscape

India was a pioneer in digital services taxation, but it was far from alone. Understanding how other countries have approached the same challenge provides context for India's current position.

Countries That Maintain Digital Services Taxes

India's complete withdrawal of its digital services tax puts it in an unusual position: it has given up unilateral taxing rights before the multilateral replacement (Pillar One) is operational. Countries like France and the UK have maintained their DSTs as leverage in OECD negotiations, while India has already conceded. This means that if Pillar One fails, India would need to re-legislate a digital tax from scratch — a process that could take 12-18 months.

Implications for Foreign Tech Companies

For US tech companies in particular, India is now one of the more favourable jurisdictions for digital revenue. The combination of abolished equalisation levies, DTAA protection against SEP-based taxation, and the Supreme Court's position that software payments are not royalties creates a window of relatively low tax exposure. However, this window may not remain open indefinitely — companies should use this period to assess their India operations structure and optimise for whatever regime emerges from the OECD process.

The OECD Pillar One Framework: What Comes Next

India's abolition of its equalisation levies was explicitly linked to the OECD/G20 Inclusive Framework's Pillar One proposal, which seeks to reallocate taxing rights to market jurisdictions (like India) for the largest and most profitable multinational enterprises.

Pillar One Amount A

Under the proposed Pillar One Amount A framework:

• Multinational enterprises with global revenue exceeding EUR 20 billion and profitability above 10% would allocate a share of their residual profits to market jurisdictions
• India, as a major market jurisdiction, would receive taxing rights over a portion of profits from qualifying companies — even without a physical presence
• In return, countries like India agreed to withdraw unilateral digital services taxes

Current Status (March 2026)

The Pillar One framework faces significant implementation challenges. The extended deadline for agreement passed without a final deal, with geopolitical disagreements among OECD/G20 Inclusive Framework members creating uncertainty. Key complications include:

• The United States has not signed the Multilateral Convention to implement Amount A
• Disagreements persist on the scope, allocation formula, and dispute resolution mechanisms
• Several countries are reconsidering whether to reintroduce unilateral digital taxes if Pillar One fails to materialise

For foreign tech companies, this creates a precarious situation: India has removed its equalisation levies, but the global framework that was supposed to replace them remains incomplete. If Pillar One collapses entirely, India may consider re-introducing a digital services tax — though the political cost of doing so, given US opposition, would be significant.

Compliance Obligations That Remain

Even with equalisation levies abolished, foreign tech companies with India revenue should monitor the following obligations:

Form 15CA/15CB Compliance

Indian businesses making payments to non-residents must file Form 15CA (online declaration) and Form 15CB (CA certificate) before remitting payments abroad. This applies to SaaS subscription payments, software licence fees, cloud hosting charges, and consulting fees paid to foreign tech companies. The Indian payor is responsible for this compliance.

Transfer Pricing

If the foreign tech company has a related-party Indian entity (subsidiary, branch, or joint venture), all inter-company transactions must comply with India's transfer pricing regulations. Technology licence fees, management charges, and service fees between the foreign parent and Indian entity must be at arm's length.

GST on Imported Services

Digital services imported by Indian businesses from foreign providers attract GST under the reverse charge mechanism. The Indian recipient must self-assess and pay 18% GST on the value of imported digital services. This is the responsibility of the Indian customer, not the foreign tech company, but it affects pricing and competitiveness.

Historical Compliance: Cleaning Up the Past

Foreign tech companies that had equalisation levy obligations during the 2016-2025 period should ensure historical filings are complete:

• 6% levy (2016-March 2025): Quarterly returns in Form 1 were due within 15 days of each quarter-end. Annual statements in Form 3 were due by June 30 each year
• 2% levy (April 2020-July 2024): Quarterly returns and annual filings with the Indian Income Tax Department
• Interest at 1% per month applies to late payment of equalisation levy
• Penalty of INR 100 per day (up to the levy amount) applies for late filing of returns

Unfiled returns from previous years can still attract penalties and interest. Companies that had equalisation levy exposure during this period should conduct a compliance review to close out any outstanding obligations. This is particularly important for companies that may not have been aware of the 2% levy's applicability to SaaS and cloud services — many mid-sized tech companies discovered their obligation only after the levy was already abolished, leaving a compliance gap for the April 2020 to July 2024 period.

Refund Claims and Credits

Foreign companies that paid equalisation levy but also had income taxed under a DTAA may have double taxation claims. The equalisation levy was not creditable against income tax in India or abroad under most DTAAs, which created genuine double taxation scenarios. Companies in this position should evaluate whether retrospective relief is available under the Mutual Agreement Procedure (MAP) provisions of their applicable DTAA, or whether domestic refund mechanisms apply under the Finance Act provisions that governed the levy.

For guidance on managing cross-border tax obligations, explore our tax advisory services or review our guide on corporate tax rates for foreign companies in India.

Key Takeaways

• Both equalisation levies are now abolished: The 2% e-commerce levy ended August 1, 2024, and the 6% advertising levy ended April 1, 2025 — together eliminating approximately INR 6,500 crore in annual tax collection
• Significant Economic Presence (SEP) rules remain active: Foreign companies exceeding INR 2 crore in India transactions or 300,000 Indian users may have India tax obligations — though DTAA protections currently limit enforcement
• Withholding tax on software and SaaS payments persists: Indian businesses paying for software licences, cloud services, or technical services must deduct tax under Section 195, with rates ranging from 10-15% depending on the applicable DTAA
• OECD Pillar One remains uncertain: The global framework meant to replace unilateral digital taxes has missed its implementation deadline, creating potential risk that India could reintroduce digital levies if the multilateral approach fails
• Historical compliance gaps should be addressed: Companies with unfiled equalisation levy returns from 2016-2025 face interest and penalties that accumulate over time