Nasscom welcomes FinMin's proposal to drop 6% equalisation levy, says positive for India-US trade talks

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.

Software industry body National Association of Software and Service Companies (Nasscom) has welcomed the Indian government's proposal to eliminate the 6 percent Equalisation Levy on online advertising services, calling it a positive step for the industry.

On March 24, Finance Minister Nirmala Sitharaman proposed withdrawing the 6 percent Equalisation Levy on online advertising services starting April 1, 2025, as part of the Finance Bill 2025. The measure is expected to address a long-standing demand from tech giants such as Google and Meta.

The move, which marks a significant shift in the country's digital taxation policy, comes days ahead of the April 2 deadline set by the US President Donald Trump for imposing reciprocal tariffs.

"In some sense, the Equalisation Levy despite being an interim measure was a problem. It sat outside the Income Tax Act. Even the industry was not able to benefit from the treaty designed (under OECD), it was a cost on the industry" Ashish Aggarwal, Vice President, Public Policy, Nasscom told Moneycontrol.

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 a 2 percent levy on non-resident e-commerce operators providing services to Indian users.

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, when the aggregate sale from these services crosses Rs 2 crore in a financial year.

In 2021, USTR (United States Trade Representative) had noted in its investigation report that this measure discriminates against US companies and is inconsistent with international tax principles.

In October 2021, India, the US, and 134 other members of the OECD/G20 Inclusive Framework reached an agreement on implementing a two-pillar solution to address the tax challenges arising from the digitalisation of the economy, after months of negotiations.

India agreed to phase out the levy once the OECD’s ‘Pillar One’ framework was implemented. The country removed the 2 percent levy on e-commerce operators in the July 2024 Budget. With this latest announcement, the entire Equalisation Levy structure will cease to exist from FY26 onwards.

While there is still no clarity on when Pillar One will be implemented, Aggarwal said that this step by the government will hopefully mean that Pillar One can be implemented in the foreseeable future.

He also noted that this is part of the larger India-US trade discussion that has been ongoing for a while.

A US trade delegation, led by Assistant US Trade Representative for South and Central Asia Brendan Lynch, are visiting India from March 25 to 29 for discussions with their Indian counterparts.

This followed US President Donald Trump and PM Modi's plans to negotiate the first tranche of a mutually beneficial, multi-sector Bilateral Trade Agreement (BTA) by the fall of 2025. Union Commerce Minister Piyush Goyal also held trade discussions with U.S. Trade Representative Jamieson Greer during his US visit earlier this month.