Equalisation Levy — Detailed Analysis
The Equalisation Levy is a withholding-based tax imposed under the Finance Act 2016 (and expanded by the Finance Act 2020) on payments made to non-resident digital service providers: a 6% levy on online advertising and related digital services paid to non-residents, and a 2% levy on e-commerce supplies and services by non-resident operators — a measure designed to tax the digital economy ahead of global consensus on Pillar One solutions.
India was among the first countries to unilaterally implement a digital services tax, introducing the Equalisation Levy in the Finance Act 2016 as a chapter outside the main Income Tax Act (to avoid treaty override complications). The original 6% levy applied to payments made by Indian residents or non-residents with a permanent establishment in India to non-resident entities for specified services — primarily online advertising, advertising space provision, and related digital services. The payer (the Indian business advertising on Google, Facebook, or similar platforms) is the deductor and must deduct and deposit the levy by quarterly deadlines.
The Finance Act 2020 substantially expanded the levy by introducing a separate 2% Equalisation Levy on consideration received by non-resident e-commerce operators from supply of goods or services to Indian persons, or supply facilitated through digital or electronic facilities. This 2% levy — commonly called the e-commerce Equalisation Levy — covered a dramatically wider set of transactions including software subscriptions, digital content, online travel bookings, and marketplace facilitated transactions. Unlike the 6% levy (paid by the Indian recipient), the 2% levy was an obligation on the non-resident operator to pay directly to the Indian government, making it analogous to a gross revenue tax on their India business.
The 2% Equalisation Levy on e-commerce created significant controversy and compliance challenges for global technology companies. Amazon, Netflix, Zoom, Adobe, and other major platforms reassessed their Indian pricing structures and in many cases passed the levy cost to Indian users through higher pricing. The levy had no minimum threshold for the 2% e-commerce variety, making even small transactions technically within scope. The definition of e-commerce supply was broad enough to cover cloud computing, online education, and digital media — creating overlap with the GST framework, which also applies to these services, raising effective tax burden concerns for some categories of supply.
India announced the withdrawal of the 2% e-commerce Equalisation Levy effective August 1, 2024, as part of a coordinated move aligned with the OECD/G20 Pillar One framework under which participating countries agreed to remove unilateral digital service taxes in exchange for the global implementation of the Amount A profit reallocation mechanism. The 6% levy on specified online advertising services remained in force as of the most recent legislative position, applying to payments for search engine marketing, display advertising, and digital marketing services to non-resident platforms.
From a compliance perspective, Indian businesses making payments for online advertising to non-resident providers must deduct the 6% Equalisation Levy and deposit it quarterly using Challan 285. An annual return in Form 1 must be filed by June 30 following the financial year. Failure to deduct or deposit attracts interest under Section 170 and disallowance of the advertising expense under Section 40(a)(ib) of the Income Tax Act — a double penalty structure that makes compliance critical for businesses with material digital advertising spend.