India to End Equalisation Levy on Digital Ads by April 1, 2025

India will remove the 6 percent equalisation levy, also known as the digital tax, on online services, including advertising, a move aimed at reducing costs for major US technology firms such as Google (owned by Alphabet), Meta, and Amazon. This step is expected to alleviate US trade concerns and foster better economic relations between the two countries.

India’s central government has proposed eliminating the 6 percent equalisation levy, commonly known as the digital tax, on online advertisements, effective April 1, 2025. The proposal, included in the Finance Bill 2025, was presented in Parliament on March 24 and subsequently received approval from both the Lok Sabha and the Rajya Sabha. It now awaits the President’s assent.

While the digital tax removal will likely bring relief to US tech giants such as Google, Meta, and Amazon, it also signals India’s intent to align its tax policies with global standards under the Organization for Economic Cooperation and Development’s (OECD) “Pillar One” framework. However, this decision carries complex implications for various stakeholders, including advertisers, Indian ad agencies, domestic media houses, and the broader digital economy. 

Understanding Equalisation Levy (EL) and its purpose 

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The digital tax was introduced in India in 2016 as a measure to tax cross-border digital advertising transactions. It was specifically designed to target non-resident digital platforms that generated revenue from Indian advertisers, even when these platforms had no physical presence in India. The levy was imposed at a rate of 6 percent on gross payments made by Indian businesses to foreign platforms, provided the invoice was issued outside India and payments were made in foreign currency. The primary objective was to level the playing field for domestic digital platforms, which were subject to Indian income tax, unlike their international counterparts. 

A major win for global digital platforms 

Global tech giants like Google, Meta, and Amazon, which account for approximately 65 percent of India’s approximately INR 500 billion (US$5.82 billion) digital advertising market, stand to benefit the most from the scrapping of the digital tax. Advertisers, who previously had to factor in the 6 percent levy when placing ads on these platforms, will now experience reduced costs, making these platforms even more attractive. 

While the levy was initially intended to prevent base erosion and profit shifting by multinational tech companies, in practice, it increased ad rates and reduced return on investment (ROI) for Indian businesses. Industry experts have also emphasized that operational compliance with the levy was cumbersome, often requiring quarterly filings and additional administrative work, which added complexity for agencies managing multi-platform campaigns. 

Challenges and opportunities for Indian ad agencies 

For Indian ad agencies, the removal of the EL presents a mixed picture. On the one hand, it will reduce compliance burdens, particularly for agencies handling international invoicing and managing multi-platform advertising campaigns. The operational ease that comes with the levy’s removal is likely to benefit larger agencies with international clients. 

On the other hand, the removal of the levy could increase competitive pressures from global platforms. As ad rates on foreign platforms become more cost-competitive, Indian ad networks and publishers may lose the pricing advantage that the levy previously afforded them. Domestic players pointed out that smaller Indian ad agencies that once benefited from the levy’s protective effects may now struggle to compete with global platforms that can offer lower costs and higher ROI returns on investment. 

The overall impact will vary depending on the scale of the agency. Larger firms catering to international clients may experience operational relief, while smaller agencies focusing on domestic clients may face challenges in maintaining their market share. 

Broader implications for India’s tax framework 

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India seeks to reduce trade tensions and encourage greater foreign investment by aligning its domestic tax policies with international standards. Digital marketing experts believe that removing the levy will simplify the country’s digital taxation regime, reduce operational hurdles in media planning, and create a more seamless digital advertising ecosystem. It is believed that this decision reflects India’s willingness to cooperate with global tax norms, which could improve its standing in the international business community. 

A shift toward data-driven advertising and future trends 

Beyond platform choices, India’s evolving digital advertising landscape is driving brands toward a more data-centric approach. As tax complexities and privacy regulations tighten, brands are increasingly focusing on first-party data to improve targeting and retargeting. India’s media pundits have observed that this shift is fostering the growth of tech-driven media ecosystems. 

This transition toward a data-first approach reflects a broader industry trend where brands are prioritizing technology-led solutions to optimize their advertising strategies. As the digital ecosystem matures, India’s digital advertising industry is poised to embrace a more technology-driven future, with enhanced targeting, improved ROI return on investments, and streamlined media operations. 

Background on India’s EL expansion and subsequent revisions 

India initially introduced the EL to tax offshore companies generating revenue from online advertisements targeting Indian consumers. However, in 2020, the scope of the levy was broadened to include a 2 percent charge on various digital services provided by non-resident entities. This expanded levy encompassed a wide range of services, including software-as-a-service (SaaS), cloud services, platform services, data-related services, financial services, online education, and the digital sale of goods. 

The expanded levy drew criticism, particularly from the United States Trade Representative (USTR), which viewed it as discriminatory against US-based digital companies. In 2021, the USTR highlighted concerns that the levy disproportionately impacted American firms, leading to the possibility of retaliatory measures, such as the withdrawal of trade benefits and the imposition of tariffs. To mitigate these tensions, India and the US reached a transitional arrangement similar to agreements the US had made with countries like Austria, France, Italy, Spain, and the UK. This arrangement remained in effect until a global tax framework, under the OECD’s BEPS 2.0 initiative, was finalized. 

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However, due to delays in finalizing the global tax deal, including Pillar One (targeting base erosion and profit shifting) and Pillar Two (introducing a global minimum tax rate of 15 percent), the arrangement was extended until the end of June 2024. India abolished the 2 percent equalization levy effective August 1, 2024, while retaining the 6 percent levy on online advertising revenues.

Conclusion 

India’s decision to eliminate the 6 percent EL is a strategic move with far-reaching consequences for businesses across the digital ecosystem. While it promises to reduce compliance burdens, enhance trade relations with the US, and create a more competitive digital advertising environment, it also presents challenges for Indian ad agencies and domestic platforms that have thrived in a protected environment. As India aligns its tax policies with global standards, businesses will need to adapt to a rapidly evolving landscape where operational agility, data-driven strategies, and technological innovation will determine success. 

(US$1 = INR 85.79) 

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