Equalisation Levy
Equalisation Levy is a direct tax introduced in India by the Finance Act 2016, levied on specified digital services and online advertisement payments made to non-resident service providers who do not have a permanent establishment in India — initially at 6% on online advertisement payments, later expanded at 2% on e-commerce supply or services.
Equalisation Levy was India's unilateral response to the global challenge of taxing the digital economy — a challenge arising from the fact that large technology companies could earn significant revenues from Indian customers without being liable to Indian corporate tax due to the absence of physical presence or permanent establishment. The levy was operationalised through a separate Chapter VIII of the Finance Act 2016, outside the Income Tax Act itself.
The initial levy of 6% applied to payments made by resident Indian businesses or non-residents with a permanent establishment in India to non-resident service providers for 'specified services' — defined as online advertisement, digital advertising space, and any provision of facility or service for the purpose of online advertisement. Payments below ₹1 lakh per year to a single service provider were exempt. Deducting entities were required to withhold 6% and remit it to the government.
Budget 2020 introduced a significant expansion through the Finance Act 2020: a separate 2% equalisation levy on 'e-commerce supply or services' provided by non-resident e-commerce operators to Indian customers. This covered sales of goods, digital products, and services to Indian buyers through digital platforms. Unlike the 6% levy which was based on deduction at source, the 2% levy was self-assessed and paid by the non-resident operator.
However, the 2% expanded levy faced significant international pushback, particularly from the United States government, which viewed it as discriminatory against US technology companies. As part of the OECD's Pillar One and Pillar Two global tax reform framework — under which countries agreed to withdraw unilateral digital taxes in exchange for a new global profit allocation regime — India agreed to withdraw the 2% e-commerce equalisation levy. The Finance Act 2024 abolished the 2% equalisation levy effective August 1, 2024.
The original 6% levy on online advertisements from non-residents continued to apply, though the practical scope narrowed considerably after Budget 2024 removed the e-commerce layer. Equalisation levy income received by non-resident companies is exempt from Indian income tax under Section 10(50), ensuring there is no double taxation between the levy and income tax on the same payment.