Equalisation Levy

The Equalisation Levy is a direct tax introduced by India to tax revenue generated by non-resident digital service providers and online advertising platforms from domestic businesses. Governed under Chapter VIII of the Finance Act 2016, it aimed to equalize the tax treatment between domestic and foreign digital enterprises before being phased out completely by April 2025.

Legislative Background and Why India Introduced the Equalisation Levy

For decades, international taxation relied on the physical presence standard. A foreign enterprise paid corporate income tax in a market jurisdiction only if it maintained a permanent establishment, such as an office, branch, or factory. The rapid growth of multinational technology companies challenged this model. Search engines, social media platforms, and digital marketplaces generated substantial revenue from Indian consumers and businesses while remaining physically outside India's direct tax net.

To address base erosion and profit shifting under OECD Action 1 recommendations, Parliament enacted the Equalisation Levy through Chapter VIII of the Finance Act, 2016. Because lawmakers placed the levy outside the Income-tax Act, 1961, it operated as an independent direct tax. This statutory structure prevented non-residents from utilizing Double Taxation Avoidance Agreements (DTAAs) to avoid the levy. Simultaneously, Parliament introduced Section 10(50) into the Income-tax Act, exempting income subject to the Equalisation Levy from regular Indian corporate income tax to prevent double taxation.

Comparing the Two Phases: Equalisation Levy 1.0 and 2.0

Between 2016 and 2025, the Equalisation Levy operated across two distinct statutory streams with different withholding obligations, rates, and coverage thresholds.

Equalisation Levy 1.0 placed the compliance obligation directly on Indian enterprises purchasing advertising space on platforms like Google, Meta, or LinkedIn. If your total payments to a single non-resident vendor exceeded Rs 1,00,000 in a financial year, you had to withhold 6% at the time of payment or credit. In contrast, Equalisation Levy 2.0 applied directly to foreign e-commerce platforms selling goods or digital services to Indian residents, requiring the overseas seller to remit 2% directly to the Indian government.

Phased Abolition of the Equalisation Levy

India became one of the first major economies to dismantle its unilateral digital services taxes in response to multilateral tax accords and bilateral trade negotiations. The 2% e-commerce levy faced international friction, particularly from the United States Trade Representative, which argued that unilateral digital services taxes disproportionately affected overseas technology companies.

In the Union Budget 2024, the government announced the abolition of the 2% Equalisation Levy under Section 165A, effective 1 August 2024, through the Finance (No. 2) Act, 2024. Subsequently, the Finance Act, 2025 completed the unwinding by withdrawing the residual 6% advertising levy under Section 165, effective 1 April 2025. This complete withdrawal paved the way for India's participation in the OECD Pillar One multilateral framework and eliminated redundant compliance costs for Indian businesses purchasing digital advertising.

Post-Repeal Tax Treatment and Cross-Border Digital Rules

Although the Equalisation Levy no longer applies to transactions conducted on or after 1 April 2025, foreign digital payments do not escape tax evaluation. Payers and service providers must now evaluate cross-border remittances under standard Indian income tax provisions and relevant double tax treaties.

The following flowchart illustrates the transition of cross-border digital payments from the Equalisation Levy to domestic withholding and treaty frameworks.

flowchart TD
    A["Digital Payment to Non-Resident"] --> B{"Transaction Date"}
    B -->|"Before 1 Aug 2024"| C["Apply 6% or 2% EL"]
    B -->|"Aug 2024 to Mar 2025"| D["Apply 6% EL Only"]
    B -->|"From 1 April 2025"| E["Levy Fully Abolished"]
    E --> F{"Assess Payment Nature"}
    F -->|"Royalty or FTS"| G["Deduct TDS u/s 195"]
    F -->|"Business Income"| H["Evaluate PE or SEP Nexus"]

Three primary mechanisms govern cross-border digital transactions following the sunset of the levy:

• Withholding Tax under Section 195: Payments for software, cloud hosting, and technical services must be analyzed to determine if they constitute Royalty or Fees for Technical Services (FTS). If characterized as Royalty or FTS, Indian businesses must deduct tax at source under Section 195 at statutory rates or lower treaty rates when the non-resident provides a valid Tax Residency Certificate (TRC) and Form 10F.
• Significant Economic Presence (SEP): Section 9(1)(i) of the Income-tax Act establishes a digital nexus in India. A non-resident creates a business connection if revenue from Indian transactions exceeds Rs 2 crore or if digital interactions engage 300,000 or more Indian users. However, eligible entities residing in countries with which India has a comprehensive DTAA can claim treaty protection in the absence of a physical permanent establishment.
• Goods and Services Tax (GST): Digital services provided by non-residents to unregistered Indian individuals remain subject to GST under the Online Information Database Access and Retrieval (OIDAR) framework, with foreign providers registering under simplified GST provisions. B2B digital imports remain subject to the reverse charge mechanism under domestic GST rules.

Historical Compliance, Form 1 Rules, and Statutory Penalties

For open financial years preceding the repeal, businesses and assessing authorities must adhere to the compliance framework established under Chapter VIII of the Finance Act 2016.

• Deposit Due Dates: The 6% Equalisation Levy deducted during any month had to be deposited with the Central Government by the 7th day of the following month using Challan ITNS 285. For the 2% levy, foreign operators remitted taxes quarterly: 7 July, 7 October, 7 January, and 31 March.
• Annual Statement in Form 1: Payers and operators had to file an annual statement in Form 1 on the Income Tax Department portal by 30 June following the end of the financial year. Form 1 can be revised within two years from the end of the financial year in which the services were provided.
• Interest under Section 170: Delayed remittance attracted simple interest of 1% for every month or part of a month during which the default continued.
• Penalties under Section 171 and 172: Failure to deduct the levy attracted a penalty equal to the levy amount. Failure to remit deducted amounts attracted a fine of Rs 1,000 per day up to the default amount. Failure to file Form 1 attracted a penalty of Rs 100 per day.
• Income Tax Disallowance: Under Section 40(a)(ib) of the Income-tax Act, 1961, failure to deduct or deposit the 6% levy before the income tax return filing due date resulted in complete disallowance of the advertising expense in corporate tax computations.

Managing Past Liabilities and Vendor Verification

Because tax authorities retain statutory powers to reopen assessments for preceding financial years, enterprises must maintain clear documentation for past digital transactions. Finance teams must verify that historical non-resident vendor invoices were correctly categorized between advertising, software licensing, and general business services.

To avoid dispute exposure during audits, organizations should implement structured cross-border vendor reviews. For detailed operational processes, consult our guide on managing Equalisation Levy on digital transactions in India. Establishing comprehensive vendor compliance ensures that your foreign counterparty profiles, TRC certificates, and historical Form 1 filings match your financial ledgers.

Modern finance departments simplify this task by integrating tax validation rules into automated accounts payable workflows and broader compliance management services. Embedding tax determination rules directly into invoice booking workflows prevents missed withholding obligations while supporting accurate balance sheet reporting under record to report outsourcing engagements.

At MYND, we support global and Indian organizations in managing corporate tax compliance and audit defense. Managing over 20 million transactions annually and over $20 billion in throughput, our teams deliver 99% compliance achievement and 80% touchless processing across accounts payable. We help businesses reconcile legacy equalisation levy statements, validate foreign vendor tax residencies, and maintain full compliance with post-repeal withholding requirements.

Frequently Asked Questions

Is the Equalisation Levy applicable to digital transactions in 2026?

No. The 2% Equalisation Levy on e-commerce operators ended on 1 August 2024 through the Finance (No. 2) Act, 2024, and the 6% levy on online advertising ended on 1 April 2025 through the Finance Act, 2025. Transactions initiated on or after 1 April 2025 are completely exempt from the Equalisation Levy.

Do Indian businesses still need to file Form 1 for past years?

Form 1 filings are only required for financial years during which the Equalisation Levy was active. If your business had unfiled obligations or needs to correct errors for past active years, you can submit or revise Form 1 within two years from the end of the relevant financial year.

What replaced the 6% Equalisation Levy for online advertising spend?

Following the repeal, online advertising payments to non-resident entities are governed by ordinary provisions of the Income-tax Act, 1961. If an overseas advertising provider lacks a permanent establishment or significant economic presence in India, and the service does not qualify as Royalty or FTS, the payment generally constitutes business profit protected from Indian withholding under applicable tax treaties.

Can foreign companies claim foreign tax credits for Equalisation Levy paid?

In most foreign jurisdictions, including the United States, the Equalisation Levy was considered a standalone turnover tax rather than an income tax. Consequently, overseas tax authorities generally did not grant foreign tax credits against home-country corporate income tax for Equalisation Levy payments, which was a central criticism leading to its eventual withdrawal.