The Equalisation Levy: India’s Digital Ad Tax (2016–2025)

It was a tax on payments to foreign digital companies. Parliament created it in the Finance Act, 2016. It sits in Chapter VIII of that Act.

Why was it created?

• Foreign firms earned money from Indian advertisers.
• They often had no office in India, so India could not tax that income.
• The levy gave India a way to tax them anyway.
• The idea came from a global tax project on digital firms, called BEPS Action 1.

What does “equalisation” mean?

It aims to level the field. Indian firms paid tax on their profits. Foreign online firms with no office in India did not. The levy tried to close that gap.

The rate was 6% of the amount paid. The payer, not the foreign firm, collected it.

Who paid what?

• It applied to online advertisement and related services.
• The foreign firm had no permanent establishment (PE) in India.
• The payer had to be a resident business, or a non-resident with a PE in India.
• It applied once the payments in a year went above ₹1 lakh.
• The payer deducted 6% and deposited it with the government.

How does it work, step by step?

1. An Indian business buys online ads from a foreign platform. 2. The platform has no permanent establishment in India. 3. The business’s payments to that platform pass ₹1 lakh in a year. 4. The business deducts 6% from each payment. 5. The business deposits the amount with the government.

What does a worked example look like?

An Indian firm pays a foreign platform ₹10 lakh for ads in a year. The levy is 6% of ₹10 lakh. That is ₹60,000. The firm pays the platform ₹9.4 lakh and deposits ₹60,000 with the government. The numbers are an illustration, not a real case.

Is it a tax on profit?

No. This is a common mix-up. The 6% is charged on the gross amount paid. It does not depend on the platform’s profit or its costs.

What was a “specified service”?

• Online advertisement.
• Providing digital advertising space.
• Any other facility or service for online advertisement.
• Any other service the Centre might notify later.

When did it start?

The Equalisation Levy Rules, 2016 came into force on 1 June 2016. The payer filed returns and paid the levy under those rules.

The levy was a separate charge. It was not part of the Income Tax Act, 1961.

What followed from that?

• Double taxation avoidance agreements (DTAAs) cover income tax.
• The levy was not income tax under the Act.
• So the usual treaty relief did not clearly apply to it.
• Commentators say a foreign firm could not claim a matching credit at home.
• To avoid taxing the same income twice, the income was exempt from income tax under section 10(50).

Is the Equalisation Levy the same as income tax?

No. Income tax is charged on income. This levy was charged on payments. It sat in its own chapter. That is why section 10(50) was needed to keep the same money from being taxed twice.

Was this settled for everyone?

Not fully. Some experts argue the levy clashes with treaty rules. The IBA article calls it a case of “juridical double taxation”. The UPSC key treats the credit claim as wrong.

The Finance Act, 2020 added a second levy. It worked in a different way.

What changed?

What did the 2% apply to?

The 2% was on money the operator received from e-commerce supply or services. The memo lists what counted:

• Supplies to a person resident in India.
• Ads sold to a customer in India, or one using an Indian IP address.
• Data sold that was collected from people in India.
• Goods or services bought using an Indian IP address.

How does the 2% look with numbers?

A foreign platform earned ₹100 crore from Indian buyers in a year. The levy is 2% of ₹100 crore. That is ₹2 crore. The platform itself owed it. The Indian buyers did not deduct anything. These figures are made up to show the sum.

Who was an “e-commerce operator”?

A non-resident who owns, operates or manages a digital platform. The platform sells goods or services online. The levy did not apply if the operator had a PE in India and the sales were linked to it.

It ended in two steps.

What happened in 2024?

• The 2% e-commerce levy stopped applying on 1 August 2024.
• The Finance Bill memo said its scope was ambiguous and led to a compliance burden.
• Income from 1 April 2020 to 31 July 2024 stays exempt under section 10(50).

What happened in 2025?

• The 6% levy on online ads stopped applying from 1 April 2025.
• The exemption in section 10(50) was removed for such ads from that date.
• After this, no Equalisation Levy remained.

What came after?

Income from these services is taxed under the normal rules from those dates.

UPSC asked this in the Civil Services (Preliminary) Examination 2018, General Studies Paper I.

How do you solve it?

• Statement 1 is wrong. The levy is in the Finance Act, 2016, not the Income Tax Act.
• Statement 2 is wrong. The levy sits outside the treaty relief.
• So the answer is (d), neither 1 nor 2.