India has announced its decision to remove the 6% equalisation levy, commonly known as the “Google tax,” on online advertisement services from April 1, 2025. The move is seen as a strategic effort to mitigate trade tensions with the US, particularly amidst ongoing negotiations. This decision is part of 59 amendments proposed in the Finance Bill by Finance Minister Nirmala Sitharaman.
Why is the Equalisation Levy Being Scrapped?
The equalisation levy was introduced in 2016 to tax foreign digital companies that earn revenue from Indian users without having a physical presence in the country. However, US President Donald Trump has threatened retaliatory tariffs on countries imposing digital taxes on US tech giants such as Google and Meta. By removing the levy, India aims to avert these tariffs and smoothen trade discussions.
Senior advisor at EY, Sudhir Kapadia, supported this move, emphasizing that the levy’s contribution to the exchequer was not substantial. Additionally, its removal signals India’s willingness to engage constructively with the US on trade policies.
Impact on Trade Relations
India and the US are currently negotiating a trade agreement, with the removal of the levy serving as a gesture of goodwill. Similar moves are also being considered by other nations, including the UK, to avoid retaliatory actions by the US.
According to Nangia Andersen LLP’s Vishwas Panjiar, the removal of the tax will provide certainty for businesses while addressing concerns about the unilateral nature of the levy.
Historical Context of the Equalisation Levy
The levy initially targeted digital advertisements and was later expanded in 2020 to cover ecommerce transactions. A 2% tax was imposed on foreign ecommerce companies conducting business worth over Rs 2 crore annually in India. However, following a global tax agreement, the 2% levy was withdrawn last August. The recent decision to eliminate the 6% levy aligns with this trend.
Other Key Amendments in the Finance Bill
Apart from the levy removal, the Finance Bill proposes:
- Facilitating Offshore Fund Relocation: Amendments to Section 9A will remove the term “indirectly” in the clause restricting Indian resident participation in offshore funds. This will encourage offshore funds to relocate to India.
- Clarification on Search and Seizure: The bill introduces the term “total undisclosed income” to clarify the objective of search and seizure proceedings, ensuring only undisclosed income is taxed.
- Return Processing Adjustments: The Income Tax Department will have the authority to make adjustments while processing returns.
Conclusion
India’s decision to eliminate the equalisation levy reflects a strategic effort to strengthen trade relations with the US and align with global tax norms. Alongside other financial reforms, this move is expected to create a more predictable and business-friendly tax environment, encouraging investments and offshore fund relocations. The Finance Bill’s amendments represent a proactive approach to managing international trade dynamics and fostering economic growth.
