With the equalisation levy gone, how taxing digital profits has become complicated

In business, nothing can convey the levels of dominance as clearly as hard numbers. Think about it. Amazon has at least 30% of India’s e-commerce business (Walmart-owned Flipkart leads the pack), while Meta has over one billion users across Facebook, WhatsApp and Instagram. If you look at Google, its search engine share is over 97%, as per Statcounter Global Stats. As a corollary, these companies command a large share of the consumer wallet and attention span, drawing more money into the overall digital advertising funnel.

A FICCI-EY report on the media and entertainment sector estimates that digital advertising revenue, excluding subscriptions, will be close to Rs 1.4 lakh crore in 2028.

These big numbers, in fact, are at the heart of a larger debate on digital services tax in India and in many parts of the world.

Battle royale

In late June this year, US President Donald Trump, through a social media post, threatened a 100% tax on imports from any country imposing a digital services tax on American technology companies. It marked another round of escalation in a complex and challenging global trade war. Trump went on to say that “this tariff will supersede trade deals made with the country, whether implemented, signed, or not.”

The issue of digital services tax has been controversial for some time. Put simply, most Big Tech companies are based in the US and operate in a way that often leaves their main income streams, such as advertising revenue or platform fees, outside the tax net in other countries. The reasons typically lie in prevailing laws and double taxation avoidance treaties. Not surprisingly, tax authorities everywhere, including in India, have struggled with this.

More than anything else, the fact that many of these companies do not have a physical presence in India poses a challenge. While they may have a GCC (global capability centre) or a development office on which tax is paid, the main revenue flows back to headquarters. There is some history to this in the Indian context. The Finance Act, 2016 introduced an equalisation levy of 6% on payments made by Indian businesses for certain services provided by non-residents without a permanent establishment in India. At that point, it applied to online advertisement services. This levy, which came to be known as the Google Tax, was expanded by the Finance Act, 2020 to cover non-resident e-commerce supply and services at the rate of 2%.

The 2% levy was abolished in the Union Budget 2024-25 and, a year later, the 6% levy was scrapped. This came soon after Trump began his second term and several Big Tech firms raised concerns. With his recent announcement, the issue is once again under discussion, though how it will play out is anyone’s guess.  

 

The complexity

The tech sector is peculiar and stands out for several reasons. Its rapid growth and multiple complications have created the need for more stringent regulation.

“Globally, developments in tech have outpaced regulatory frameworks. For Big Tech companies, it becomes even more challenging given their omnipresence across borders,” points out Arush Khanna, Partner, Numen Law Offices.

The difference in taxation regimes for traditional brick-and-mortar sectors, he says, has often been pre-emptive. “However, in the digital space, taxation systems have often been responsive (if not reactive or retrospective). Cryptocurrency, bitcoin trading and online gaming are perfect examples of the tax regime playing perfect catch-up to sectoral growth.” That means by the time an adequate matrix is in place, the money has already been made.

What makes the issue more intricate is the strange paradox around Big Tech companies deriving revenue from Indian advertisers but not necessarily having a physical presence or Permanent Establishment (PE) in India.

Amit Agarwal, Senior Partner, Nangia & Co LLP, articulates this by saying that under India’s tax treaties, the business profits of a foreign enterprise are taxable in India only if it has a PE in India. “Consequently, India has historically faced challenges in taxing the digital profits of foreign technology companies. It was with this in mind that we introduced the equalisation levy outside the Income Tax Act and the tax treaty framework,” he says.

It is important to understand that this is not merely a matter of shifting taxes to low-tax jurisdictions. “Rather, it represents a fundamental clash between traditional 20th century international tax frameworks and the modern digital economy. Historically, under Articles 5 and 7 of the OECD (Organisation for Economic Co-operation and Development) model tax convention, a country’s legal right to tax a foreign corporation’s business profits was pre-conditioned on the existence of a PE, which requires a physical brick-and-mortar presence,” says Khanna.

That rule, of course, is pushed to the limit when it comes to the tech giants: without a physical footprint, they can avoid traditional taxation thresholds.

Without a doubt, tech companies are breathing easier after the scrapping of the equalisation levy. “They gained the most out of it as they pioneered online promotions, gaming and all possible forms of digital content absorbed by the ever-eager Gen Z and many of those who have now shifted from traditional physical paper-based reading to digital apps,” says Swapnil Kothari, senior corporate lawyer and Managing Partner, S. Kothari & Co.

Emails sent by Business Today to Amazon, Google and Meta specifically on the issue of equalisation levy did not elicit a response.  

The real numbers

The equalisation levy was abolished in 2025, potentially triggered by trade tensions with the US. “One has to see this in a larger context, where even at its peak, the levy raised only around Rs 3,900 crore, which is minuscule in the overall scheme of things. In any case, companies like Meta and Google render these services through Indian entities that do pay tax,” explains Ketan Dalal, Managing Partner, Katalyst Advisors.

This is how the model works: the global entity bills the Indian subsidiary, and the subsidiary, in turn, pays a significant amount to the Indian parent. Eventually, the Indian subsidiaries are usually left with relatively small profits. “But that payment to the parent is essentially a transfer-pricing matter, for which there are separate and well-established regulations. Hence, it may not be appropriate to conclude that there is a diversion of profit, because transfer pricing is precisely the mechanism to ensure that inter-company payments are appropriate, at arm’s length, and aligned with where the profit should actually belong.”

Globally, the OECD and G20 framework on Base Erosion and Profit Shifting (BEPS) aims to tackle challenges around the digital economy, where MNCs move profits to low- or no-tax jurisdictions. The loss in annual revenue could be to the tune of $100-240 billion, or 4-10% of global corporate income tax, according to the OECD.

According to Rohinton Sidhwa, Partner, Deloitte India, given the state of the world order today, any further progress on Pillar One of BEPS—which reallocates taxing rights over MNCs to countries where their consumers are, regardless of whether they have a physical presence there—is unlikely. “Taxing international payments for several online services (such as those for advertising and promotional services) will be challenging due to the prevailing tax laws and treaty dispensations,” he says.

The rub is that both phases of the equalisation levy have now been withdrawn. “With that, India currently does not have a dedicated digital services tax applicable to foreign technology companies. Consequently, taxation of digital revenues would primarily need to be examined under the traditional provisions relating to royalty/fees for technical services and significant economic presence,” says Nangia & Co’s Agarwal.  

Now what?

As things stand, several angles are at play. Defining the nature of a service in the digital world is not easy, and online advertising is no exception.

Globally, according to Dalal, the picture is mixed. “India and Canada have done away with their digital levies, while some countries never introduced one. The UK, France, Italy and Spain continue to have such levies,” he explains.

While the OECD has been trying to arrive at a global tax-allocation model, securing universal support is tricky. “Besides, it has a limited set of member countries. India is not an OECD member but the US is.” That, among other things, indicates how difficult the journey is.

Kothari thinks the chances of the equalisation levy being reintroduced appear bleak, given the comity of nations and the global village the world is becoming. “India, being the leader of the Global South, cannot unilaterally reintroduce it without inviting the displeasure of other countries and, more so, the tech giants, who in turn have a tremendous say over their own governments. The UK and Australia still have the Google Tax in some way or another, whether you call it a diverted profits tax or a digital services tax. However, these countries have ensured that the mega-corporations still find it attractive to do business in their markets,” he says with clarity. In what form the issue will resurface, if it indeed does, promises to be interesting—and not without complexity.

 

@surabhi_prasad, @krishnagopalan