Context and Background
- The equalisation levy (EL) was introduced to tax foreign tech giants benefiting from India’s digital economy without a physical presence.
- The 6% EL was applied to payments made to non-resident entities for online advertisement services.
- A 2% EL was imposed on non-resident e-commerce operators in 2020, but it was removed in 2024.
- The government now proposes abolishing the 6% EL from April 1, 2025, as part of the Finance Bill, 2025.
- The move is seen as a preemptive measure to avoid retaliatory U.S. tariffs, expected to be imposed on April 2.
Relevance : GS 2(Governance) , GS 3(Tax Structure)
Implications and Impact
- Improved US-India Trade Relations:
- Averts potential retaliatory tariffs by the U.S. on Indian exports.
- Enhances bilateral trade negotiations and aligns India’s tax policies with global norms.
- Boost to Foreign Investment in Digital Economy:
- Makes India a more attractive market for foreign digital companies.
- Could encourage greater investments in India’s digital infrastructure.
- Revenue Implications:
- Potential loss of tax revenue for the government.
- May necessitate alternative taxation mechanisms, possibly under a global tax framework.
- Shift Towards OECD-led Global Tax Reforms:
- Aligns India with the OECD’s Pillar One and Pillar Two framework for global digital taxation.
- Increases India’s credibility in global tax negotiations.
Factors Leading to the Move
- US Opposition and Retaliatory Tariff Threats:
- The 2% digital tax previously imposed led to USTR investigations and strong pushback.
- U.S. threatened trade barriers if digital taxes were not removed.
- Global Tax Reforms Under OECD Framework:
- India had agreed to gradually phase out unilateral digital taxes under the OECD’s global tax deal.
- Removal of EL aligns with the global minimum tax and fair taxation of multinational corporations.
- Concerns Over Double Taxation:
- EL created compliance burdens and risked double taxation on non-resident firms.
- Countries like the U.S. argued that Indian businesses were already benefiting from user-based taxation models.
- Evolution of India’s Digital Tax Policy:
- Initially introduced to tax digital services provided by foreign firms in the absence of a physical presence.
- With global tax cooperation improving, India is moving toward a multilateral framework.
Way Forward
- Strengthening Global Tax Coordination:
- Continue participating in the OECD Inclusive Framework to secure fair taxation rights.
- Alternative Tax Measures:
- Explore corporate tax adjustments or profit-based taxation rather than transaction-based levies.
- Ensuring a Level Playing Field for Domestic Firms:
- Consider new policies to protect Indian digital startups from aggressive foreign competition.
- Monitoring the Impact on Government Revenues:
- Assess revenue implications and evaluate alternative tax structures if needed.
