The Equalisation Levy is a special tax that India has placed on some online services and products, especially those coming from foreign companies that earn money from Indian users. This levy helps make sure that even if a company does not have a physical office in India, it still pays taxes here if it makes money through digital means from Indian customers. With the growth of the internet and digital businesses like online ads, e-commerce, and streaming, the Equalisation Levy was introduced to ensure fairness in the tax system.

This topic is very important for UPSC Civil Services Examination, especially for General Studies Paper III under the subjects of Indian Economy, Taxation, and Challenges of Digital Economy. It can also be linked to international relations and trade agreements, making it relevant to GS Paper II. For the Prelims, this is part of current affairs and economic policies.

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An Equalisation Levy is a tax introduced by the Indian government to collect money from foreign digital companies that make profits from Indian users but do not have offices in India. It ensures that these companies pay their fair share of tax, even if they are not based in India. This tax is not paid by the user but by the company that is giving the digital service. The levy helps India collect revenue from global companies that do business in India using the internet.

Background of Equalisation Levy

The Equalisation Levy was first introduced in the Finance Act, 2016. It started as a 6% tax on online advertisement services provided by foreign companies to Indian businesses. This was India’s way of addressing a global tax issue: many international companies were making big profits from Indian users but were not paying any taxes here because they did not have a permanent office or setup in the country.

In 2020, the scope of the levy was widened. A new 2% Equalisation Levy was introduced on e-commerce supply or services, which included goods and services sold online by foreign companies to Indian customers. This was aimed at companies like Amazon, Google, Facebook, and other global platforms earning revenues in India without being taxed properly.

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Purpose of Imposing Equalisation Levy

The main reasons for introducing the Equalisation Levy are:

• Fairness in taxation: Indian companies pay taxes on their earnings, but many foreign digital companies were not paying taxes, even though they were making large profits from India. This tax brings fairness.
• Protecting Indian businesses: Indian online service providers were at a disadvantage compared to global players who were not being taxed. The levy helps create a level playing field.
• Increasing government revenue: As more business moves online, taxing digital services helps the government earn more money to support development.
• Digital economy regulation: It helps India keep track of the large and growing digital economy, which is often difficult to monitor under traditional tax rules.

Read the article on the Tax Buoyancy!

Not every company or transaction is covered under the Equalisation Levy. The tax is applicable when certain conditions are met:

• The service provider must be a non-resident (foreign) company.
• The buyer of the service or the user of the platform should be in India.
• For the 6% levy (started in 2016), the total payment for digital advertisement must be more than ₹1 lakh per year.
• For the 2% levy (started in 2020), it applies to foreign e-commerce operators who:
  • Sell goods or services to Indian residents
  • Sell to non-residents using an Indian IP address
  • Sell to persons who buy on behalf of Indian residents

Read the article on the Value Added Tax (VAT)!

Equalisation Levy Applicability

The applicability of Equalisation Levy depends on the type of digital service and who is involved in the transaction. Here’s how it is applied:

Type of LevyRateApplicable ToStarted InAdvertisement Services6%Foreign companies offering ads to Indians 2016E-commerce Supply/Service2%Foreign digital sellers or platforms2020

A key point to remember is that if a foreign company already has a permanent office in India, then it does not need to pay the Equalisation Levy. Instead, it will pay regular income tax.

Read the article on the Direct Tax Code!

Services Covered Under Equalisation Levy

There are two main types of services covered under the Equalisation Levy:

• Digital Advertisement Services (6%): This includes:
  • Online ads on websites or apps
  • Fees for placing ads online
  • Ads on search engines and social media platforms
• E-commerce Services (2%): This includes:
  • Sale of physical or digital goods through a foreign platform
  • Online streaming or downloads
  • Online gaming, subscriptions, or any service provided online to Indian users

Some examples of companies affected by this levy include Google, Facebook, Amazon, Netflix, and Alibaba, when they earn from Indian users or businesses.

Read the article on the New Income Tax Bill 2025!

Concerns Associated with Equalisation Levy

Even though the Equalisation Levy brings more tax and fairness, it also comes with challenges and concerns:

• Double taxation: Some foreign companies may end up paying tax in their home country and again in India.
• Trade tensions: Countries like the USA have raised concerns, saying this targets American companies unfairly.
• No input tax credit: Companies cannot claim a refund or credit for the tax paid under this levy, which increases their cost.
• Uncertainty in rules: The levy’s rules are still evolving, and there is confusion in some areas, especially about who needs to pay and how it is calculated.
• Impact on consumers: Some companies may increase their prices to recover the cost of the tax, which means users in India may pay more for online services.

Despite these concerns, India has defended the Equalisation Levy as a necessary step to deal with the fast-growing digital economy and the need for proper taxation.

Read the article on the Goods and services tax(GST)!

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