India has announced plans to abolish the 6% equalisation levy, commonly referred to as the ‘Google tax’, effective April 1, 2025. This tax, introduced in 2016, targeted foreign digital advertising services and predominantly impacted U.S.-based technology companies such as Google, Meta, and Amazon.
Background of the Equalisation Levy
The equalisation levy was implemented to ensure that foreign digital service providers contributing to India’s digital economy paid their fair share of taxes, even without a physical presence in the country. Initially set at 6%, the levy applied to payments exceeding ₹1 lakh annually made to non-resident service providers for online advertisements.
U.S. Opposition and Trade Implications
The United States criticized the levy as discriminatory, arguing that it unfairly targeted American companies while exempting domestic firms. In response, the U.S. threatened to impose retaliatory tariffs on countries implementing such digital taxes, including India. This development raised concerns about escalating trade tensions between the two nations.
Strategic Decision to Abolish the Levy
In a move to ease these tensions and foster better trade relations, the Indian government proposed the removal of the equalisation levy through amendments to the Finance Bill 2025. This decision aligns with ongoing negotiations aimed at achieving a bilateral trade agreement, with both countries targeting $500 billion in two-way trade by 2030.
Impact on the Digital Advertising Sector
The abolition of the levy is anticipated to benefit U.S. tech giants by reducing their tax liabilities in India. Additionally, it is expected to make digital advertising more affordable for Indian businesses, particularly startups and small enterprises, potentially leading to increased advertising expenditures and growth within the digital economy.
Alignment with Global Taxation Efforts
India’s decision also reflects its commitment to international efforts led by the Organisation for Economic Co-operation and Development (OECD) to establish a standardized global tax framework for digital services. By removing unilateral measures like the equalisation levy, India aims to contribute to a more consistent and fair international taxation system.
Conclusion
The removal of the 6% equalisation levy marks a significant shift in India’s digital taxation policy. This move is poised to strengthen U.S.-India trade relations, support the growth of India’s digital advertising sector, and align the country with global initiatives for fair digital economy taxation.
