Equalisation Levy Abolished in India – What It Means for Businesses

India’s digital taxation landscape has undergone a major shift with the abolition of Equalisation Levy (EL). This change significantly impacts businesses making payments to foreign digital platforms such as Google, Meta, and Amazon, along with SaaS providers and global marketplaces.

What was Equalisation Levy?

The Equalisation Levy was designed to tax digital transactions involving non-resident companies earning income from Indian users without establishing a physical presence in India.

It mainly covered two categories:

1. 6% Levy on Online Advertising (introduced in 2016)

• Applicable on payments for digital advertising services provided by non-residents

2. 2% Levy on E-commerce Operators (introduced in 2020)

• Applicable on foreign e-commerce platforms earning revenue from Indian users

Key Change: EL has been abolished

As per the Finance Act, 2025, the government has withdrawn the Equalisation Levy provisions in a phased manner:

• 2% E-commerce levy removed from 1 August 2024
• 6% advertising levy removed from 1 April 2025

Effectively, Equalisation Levy no longer applies for FY 2025–26 onwards

Why was it abolished?

The government aligned this decision with global tax reforms and trade considerations:

• Move towards OECD global tax framework (Pillar 1 & Pillar 2)
• Avoiding double taxation and trade disputes (especially with the US)
• Simplifying digital taxation structure in India
• Shifting focus to Income-tax Act based taxation

What replaces Equalisation Levy now?

There is no direct replacement tax, but transactions are now governed under:

✔ Section 195 – TDS on payments to non-residents

Businesses must now evaluate:

• Whether the payment is Royalty
• Whether it is Fees for Technical Services (FTS)
• Whether it is Business Income (and if PE exists)

Tax is now determined under the Income-tax Act + DTAA, not a separate levy. For more details on the definition and implications of such payments, refer to the official guidelines.

Practical impact on businesses

Before (EL regime):

• Flat 2% or 6% tax
• No DTAA benefit
• No PE analysis required

Now (post EL abolition):

• No fixed levy
• Tax depends on classification of income
• DTAA benefit available, which can be facilitated through appropriate tax deductions
• TDS compliance under Section 195 is required, as detailed in Form 16B

Key compliance shift

Businesses must now:

• Review all foreign vendor payments
• Classify income correctly (royalty / FTS / business income)
• Apply DTAA wherever applicable, ensuring they benefit from tax challans and accurate filing
• Deduct TDS under Section 195 if taxable
• Maintain documentation (TRC, Form 10F, PE declaration), a process streamlined by using Form 3CD

Example: Digital advertising payments

Earlier:

• Google Ads → 6% Equalisation Levy

Now:

• Google Ads → evaluate under Section 195 → may be treated as royalty → TDS applicable depending on DTAA compliance and return status

Conclusion

The abolition of Equalisation Levy marks a major shift in India’s digital tax regime. While it simplifies one layer of taxation, it increases the importance of correct income classification and DTAA analysis under Section 195. Businesses must now move from a flat-tax mindset to a legal-tax classification approach. ITR Filing. Addressing these challenges is crucial under the new tax regime in India.