FM Nirmala Sitharaman proposes to withdraw 2% equalisation levy in Budget 2024

Union finance minister Nirmala Sitharaman tabling Union Budget 2024-25 in Parliament

Finance Minister Nirmala Sitharaman has proposed to withdraw the 2 percent equalisation levy in the Union Budget for 2024-25, a move that is expected to provide relief to digital companies.

In her budget speech on July 23, Sitharaman said the proposal has been made in the Finance Bill. The levy shall no longer be applicable on or after August 1, 2024.

India first introduced the equalisation levy in 2016 as a measure to tax profits generated by non-resident digital companies providing services to Indian firms, or those with a physical establishment in the country.

The move was designed to ensure a level playing field for local digital businesses that were subject to income tax on providing such services in the country.

The government initially charged a 6 percent levy on specified digital services, such as online advertising, or any other facility or service for the purpose of online advertisement, where the gross consideration from an Indian resident or a non-resident firm with a physical presence in India is more than Rs 100,000 in a financial year.

In April 2020, the scope of the equalisation levy was widened to include the consideration received by non-resident e-commerce operators.

This includes all foreign companies who own, operate, or manage an e-commerce facility or platform for the online sale of goods and services, or even those who facilitate such sales.

The government levies 2 percent tax on payments received or receivable by the non-resident e-commerce operators for online sales of products or services. This tax will apply only when the aggregate sale from these services crosses Rs 2 crore in a financial year.

"Equalisation levy withdrawal was a big blow to many US digital companies. Today's move will provide a big relief to them. One has to see the fine print to see how these digital services will be taxed" said Amit Maheshwari, Tax Partner, AKM Global in a statement.

Equalisation levy had become a bone of contention between India and the US, which had even threatened to impose retaliatory taxes on India.

In November 2021, India and the US agreed on an interim arrangement on digital tax, similar to agreements signed by the US with countries such as the UK, Spain, Italy and Austria.

This move came a month after India, the US, and 134 other members of the OECD/G20 Inclusive Framework reached an agreement on the statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy in October 2021.

As per the interim arrangement, countries that had implemented specific tax measures before October 2021, won’t have to withdraw these measures until the implementation of Pillar 1.

However, if the taxes collected by these countries during the transition period are higher than what would be due under the new Pillar 1 system in its first full year, companies can use the excess amount as credit and offset it against their future tax liability.

This agreement was valid from April 1, 2022 till implementation of Pillar 1, or March 31, 2024, whichever was earlier. Last month, the finance ministry said the validity of the agreement was later extended to June 30.

“India and the United States will remain in close contact to ensure that there is a common understanding of the respective commitment and endeavour to resolving all issues on this matter through constructive dialogue” the ministry said in a statement on June 28.