Why India Scrapped The Google Tax
Tax rules and filing guide
Expert brief on Why India Scrapped The Google Tax for businesses, promoters, and individuals. Reconcile with latest notifications before filing.
Post Your Requirement - FreeThe Abolition of Equalization Levy & Significant Economic Presence
India introduced the Equalization Levy (popularly known as the "Google Tax") in 2016 at 6% on online advertisement services, and expanded it in 2020 by adding a 2% levy on e-commerce supplies made by non-resident operators. To prevent double taxation and align with the OECD Pillar Two global minimum tax consensus, India has abolished the 2% Equalization Levy.
The Transition to Significant Economic Presence (SEP)
With the phasing out of the Equalization Levy, digital business taxation is governed by the **Significant Economic Presence (SEP)** provisions under Section 9(1)(i) of the Income-tax Act, 1961:
- Revenue Threshold: Any non-resident entity carrying out transactions in respect of goods, services, or property with any person in India exceeding ₹2 crore in a financial year constitutes an SEP in India.
- User Threshold: Any non-resident entity systematically and continuously soliciting business activities or engaging in interaction with 3,0,000 or more users in India also constitutes an SEP.
- Business Connection: Once an SEP is established, the profits attributable to digital transactions in India are deemed to accrue or arise in India and are taxable as corporate income (subject to DTAA treaty benefits).
Equalization Levy vs. Significant Economic Presence (SEP)
| Particulars | Equalization Levy (Abolished) | Significant Economic Presence (SEP) |
|---|---|---|
| Tax Rate | 2% on gross e-commerce sales; 6% on online ads. | Standard corporate tax rates (typically 40% on net profits attributable to India). |
| DTAA Treaty Relief | Not covered under DTAA; no foreign tax credit available. | Fully covered under DTAA. Non-residents can claim treaty benefits if they do not have a Permanent Establishment (PE). |
Pillar Two Global Minimum Tax Implementation
The abolition of the Equalization Levy is part of India's commitment to the G20/OECD inclusive framework on BEPS (Base Erosion and Profit Shifting). Pillar Two introduces a global minimum tax rate of 15% on Multinational Enterprises (MNEs) with consolidated annual revenues exceeding €750 million. If an MNE's effective tax rate in India falls below 15% (due to tax incentives), other jurisdictions can collect a top-up tax, and vice versa.
Frequently Asked Questions
1. What is the Equalization Levy in India?
The Equalization Levy is a direct tax on digital transactions, introduced in 2016 at 6% on online advertising services. In 2020, a 2% levy was added on e-commerce supplies of goods or services made by non-resident operators.
2. When was the 2% Equalization Levy abolished?
The 2% Equalization Levy was abolished effective August 1, 2024, by the Finance (No. 2) Act, 2024. No levy is charged on e-commerce supplies made on or after this date.
3. Why did India scrap the 2% Equalization Levy?
It was scrapped to prevent double taxation, avoid trade disputes (such as Section 301 investigations by the US Trade Representative), and align with the OECD Pillar Two global tax framework which requires countries to phase out unilateral digital services taxes.
4. What is Significant Economic Presence (SEP) under Section 9(1)(i)?
SEP is a rule that establishes a taxable 'business connection' in India for non-resident digital entities based on revenue (transactions exceeding ₹2 crore) or users (systematically engaging with 3,0,000 or more Indian users).
5. How does the abolition of Equalization Levy affect non-resident digital companies?
They are no longer subject to the 2% gross levy on Indian sales. However, if they exceed the SEP thresholds, they must evaluate their taxability under Section 9(1)(i) and determine if profits are attributable to India.
6. Can non-resident companies claim DTAA treaty benefits for SEP?
Yes. Unlike the Equalization Levy, corporate income tax under SEP is covered by Double Taxation Avoidance Agreements (DTAAs). If the non-resident's home country has a DTAA with India, they can claim that they do not have a Permanent Establishment (PE) in India, which often exempts their business profits from Indian tax.
7. What is the threshold limit for SEP transactions in India?
The transaction revenue threshold is ₹2 crore (₹20,00,000) in a financial year, representing the aggregate value of transactions in respect of any goods, services, or property.
8. What is the user threshold limit for establishing an SEP?
The user threshold is 3,0,000 (three lakh) active users in India with whom the non-resident systematically and continuously interacts or solicits business.
9. What is the Pillar Two global minimum tax?
Pillar Two is a global agreement to ensure that multinational enterprises (MNEs) with revenues exceeding €750 million pay a minimum effective tax rate of 15% on their profits in every jurisdiction where they operate.
10. Does the 6% Equalization Levy on online advertising still apply?
Yes, the 6% levy on online advertising services received by non-resident entities from Indian businesses remains in force, though it is subject to review as digital tax agreements evolve.
11. What compliance was required for the 2% Equalization Levy?
Non-resident e-commerce operators had to deposit the levy quarterly on the 7th of the month following the quarter (or March 31 for the last quarter) and file an annual statement in Form 1 by June 30.
12. What is the penalty for delayed payment of Equalization Levy?
Delayed payments attract simple interest at 1% per month. Failure to deposit the levy can attract a penalty equal to the unpaid levy amount under Section 171 of the Finance Act, 2016.
13. How does a non-resident file returns for SEP in India?
If a non-resident has an SEP and taxable income in India, they must obtain an Indian PAN, file a corporate income tax return in Form ITR-6, and undergo a tax audit if turnover exceeds the statutory thresholds.
14. What is the rate of corporate tax for non-resident companies in India?
The standard corporate tax rate for foreign companies in India is 40% (plus applicable surcharge and cess, making the effective rate up to 43.68%).
15. How do Indian companies verify if a foreign vendor is subject to SEP?
Indian companies should obtain a declaration from the foreign vendor stating their tax residency, PAN details, and whether they constitute an SEP or PE in India, which determines TDS applicability under Section 195.