India to Abolish 2% Equalisation Levy on Non-Resident Digital Companies from August 1, 2024

The decision by India to abolish the 2 percent equalisation levy while retaining the 6 percent equalisation levy on online advertising revenues aligns with the country’s global commitments under the OECD’s Pillar Two framework.

In her Union Budget 2024 speech, India’s Finance Minister Nirmala Sitharaman proposed abolishing the 2 percent equalisation levy on a wide range of services provided by offshore technology firms.

This includes services such as software-as-a-service, cloud services, online education services, and e-commerce operations, and would be effective from August 1, 2024.

The 6 percent equalisation levy will continue to be imposed on online advertising revenues.

Background

In 2020, India had expanded the scope of its equalisation levy—initially introduced in 2016 for offshore firms hosting advertisements targeting Indian consumers—to encompass other e-commerce services provided by offshore entities.

A 2021 report by the US Trade Representative (USTR) described the expanded levy as discriminatory against the US given that several of the affected entities were based there. Also, the 2 percent levy covered a wide range of services – software as a service (SaaS), platform services, data-related services, cloud services, financial services, education services, and digital sales of a company’s own goods.

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Despite the contention and the fact that the USTR was in a position to take action under US laws—such as via withdrawal of trade benefits and imposing duties or import curbs—the two countries agreed on a transitional deal similar to those the US had reached with Austria, France, Italy, Spain, and the UK. This deal was applicable until a global tax treaty was signed or until the end of March 2024. As the proposed global tax deal, including OECD BEPS 2.0 measures to address tax evasion by digital economy firms has not yet been signed, other countries extended the scope of the transitional arrangement until the end of June. India also agreed with the US to extend the arrangement until the end of June, according to a finance ministry statement on June 28.

Pillar One of the OECD’s project targets tax base erosion and profit shifting and Pillar Two introduces a global minimum tax rate of 15 percent.

Clarity needed for July applicability

While the proposal to revoke the 2 percent equalisation levy is set for August 1, tax experts seek clarity on its applicability for July, given that the due date for depositing the levy under the current system is August 7.

Tax position and compliance

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The 2 percent equalisation levy targeted digital companies without a physical presence in India to create a level playing field for Indian e-commerce firms subject to local tax laws. However, its low monetary threshold and broad applicability posed significant compliance challenges. As mentioned earlier, the levy was a thorn in India-US bilateral ties, as many affected companies were based in the US.

Tax experts note that the 2 percent equalisation levy’s broad application extended beyond typical digital business models, creating significant ambiguity and confusion. Furthermore, since the levy was not classified as a ‘tax’ under income tax laws, it complicated creditability issues for income earners in their home jurisdictions.

Another point of contention was the service classification and whether the digital companies should be taxed for royalties or fees for technical services. Disputes frequently arose between the understanding of the levy’s scope by India’s tax department and foreign companies, even when the levy was paid.

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