India’s Removal of Digital Ad Tax Will Be a Boon to Big Tech

India’s decision to withdraw the 6% digital services tax—the equalization levy—will likely ease costs for foreign taxpayers (particularly big tech companies) in terms of tangible economic gains as well as a reduced compliance burden.

Companies offering digital services in India may want to consider revisiting their structures to evaluate the most effective way of conducting business there. The tax landscape in relation to digital services also will have to be carefully monitored.

The 6% levy introduced in 2016 on foreign enterprises providing digital advertising services gave India additional taxing rights with respect to the growing digital advertising space, and meant affected taxpayers had to review their business models.

The withdrawal of the 6% levy comes months after India withdrew the 2% equalization levy that was introduced in 2020 for foreign e-commerce operators on the supply of “e-commerce services” and had a significantly wider scope by including online sale of goods/provision of services and their facilitation.

For now, it remains unclear whether the historical tax controversies regarding digital services—particularly, characterizing such income as “royalty”—will gain fresh life after the withdrawal of the equalization levy.

While the US administration has termed such levies as trade barriers that are “discriminatory ” toward US companies, their withdrawal appears unlikely in countries such as France and the UK, despite the risk of retaliation.

Imposing digital service taxes has been a contentious issue in international taxation, as the pre-existing system of international tax treaties is ill equipped to deal with taxation of cross-border digital services from market economies’ perspective.

The Organization for Economic Cooperation and Development’s Pillar One framework, a multilateral solution tailored to ensure a fair and consistent allocation of tax revenue from digital services, was also premised on countries withdrawing digital services taxes. However, given the huge tax revenues at stake, major economies such as France, the UK, and Canada have implemented unilateral digital service taxes.

In the context of India, issues concerning digital services taxation were contested before the 6% levy was introduced. Tax authorities often sought to tax income from digital services as “royalties,” which would be taxable in India regardless of a physical presence of the service provider in India.

However, taxpayers were often successful in appellate proceedings against such orders in light of the narrower scope of “royalties” under India’s tax treaties, which prevail over the domestic tax law to the benefit of taxpayers.

Introduction of the 6% equalization levy sought to put the controversy to rest, and it was styled in such a manner that it wouldn’t constitute a tax on a service provider’s “income”—keeping it outside the scope of India’s tax treaties. Rather, the equalization levy effectively operated as a transaction tax and was imposed on the gross sales consideration of the service provider.

It’s estimated that the equalization levy generated approximately 68 billion Indian rupees ($795 million) in tax revenue in the past two years alone.

The withdrawal of the 6% levy comes amid heightened international tensions arising from US trade tariffs. The Indian government, however, clarified that it wasn’t a reaction to the ongoing tariff negotiations but was instead in line with India’s commitment to the Pillar One framework, which requires withdrawing unilateral digital services taxes as a condition for being eligible to receive additional tax revenue under the framework.

The withdrawal of the 2% equalization levy in mid-2024—before the present trade tariffs discussions—was done on account of practical challenges arising from the ambiguous nature of the provision, which created a substantial compliance burden for taxpayers.

Whether this trade-off will result in India deriving additional tax revenue under the Pillar One framework in future remains uncertain.

The withdrawal of the equalization levy also comes at a time when the Indian government has forgone significant tax revenue (approximately 1,000 billion rupees) by virtually exempting individuals earning less than 1.2 million rupees annually from income tax.

Given that a withdrawal of digital services tax was one of the foundational aspects of the OECD’s two-pillar solution, its fate will be closely monitored from an Indian perspective to evaluate whether India gains anything from withdrawing it.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Raghav Bajaj is counsel in the direct tax practice group in the Mumbai office of Khaitan & Co.

Anuraag Bukkapatnam is an associate in the Mumbai office of Khaitan & Co.

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