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Scrapping of Equalisation Levy/Google Tax
Context:
The Indian government has decided to abolish the 6% Equalization Levy (Google Tax) on online advertisement services provided by offshore digital firms. This move aligns with India’s efforts to ease trade tensions with the United States and facilitate a broader trade agreement. The tax withdrawal is part of amendments to the Finance Bill, 2025, expected to be approved by Parliament this week.
About Equalization Levy (Google Tax)
- Introduced in 2016, the levy aimed at taxing digital economy firms that earned revenue from Indian businesses without having a physical presence in India.
- Initially applied at 6% on online advertisement services, primarily impacting global tech giants like Google, Meta, and Amazon.
- In 2020, an additional 2% levy was imposed on a wider range of digital services, including cloud computing and e-commerce services.
- The objective was to ensure fair taxation of the digital economy, as traditional tax laws based on physical presence could not capture these revenues.
Rationale Behind the Withdrawal
- Trade Negotiations with the US
- The US had criticized the tax as discriminatory and unreasonable, leading to threats of retaliatory tariffs.
- President Donald Trump announced reciprocal tariffs on several trading partners, including India, from April 2, 2025.
- A US delegation, led by Brendan Lynch (Assistant USTR for South and Central Asia), is currently in India to discuss trade relations.
- Harmonization with Global Tax Frameworks
- Many countries, including India, had introduced digital service taxes as part of efforts to tax the digital economy.
- The G20-OECD framework aimed at creating a global taxation system for digital firms, but the US withdrew its commitments in January 2025, leading to policy uncertainty.
- India’s move is seen as a step towards compliance with international tax norms and fostering global cooperation.
- Reducing Compliance Burden on Digital Firms
- Removal of the tax will lower costs for digital advertising consumers in India.
- It will also ease the compliance burden for companies like Google and Meta, who otherwise had to remit taxes despite having no local physical presence.
- Boosting Bilateral Trade Relations
- During PM Modi’s recent visit to the US, both nations set a Mission 500 goal to double bilateral trade to $500 billion by 2030.
- The removal of the levy is a goodwill measure to improve trade dynamics and strengthen US-India economic ties.
Economic and Policy Implications
- Potential Revenue Loss for India
- The levy contributed to tax revenue collection, and its removal may lead to a temporary decline in revenue.
- However, the government is working on new rules for taxing foreign firms under regular tax provisions to compensate for this loss.
- Lower Advertisement Costs for Indian Businesses
- Digital advertising expenses may decline, benefiting Indian companies that rely on global platforms for outreach.
- Could boost small and medium enterprises (SMEs) and startups, which depend heavily on online marketing.
- Precedent for Other Digital Economy Taxes
- Countries like the UK are also considering abolishing their digital services tax before April 2, 2025.
- This signals a global shift towards negotiated taxation regimes rather than unilateral levies.
