Context:

• The government has proposed the abolition of the 6% Equalisation Levy on online advertising in the Finance Bill 2025, reducing the tax burden on digital ad consumers and lowering costs on platforms like Google and Meta.
• This is a significant move in the context of the ongoing Indo-US bilateral trade talks, and the imminent threat of reciprocal tax, which is likely to come into force from 2nd April, 2025.
• If passed in parliament, the 6% Equalisation Levy would cease to exist from 1 April 2025. The origins of the equalisation levy have generated interest as we say goodbye to it.

The Genesis of Equalisation Levy:

• Introduced in 2016 via the Finance Act, rather than the Income-tax Act, to avoid treaty override.
• Aimed at taxing online advertising revenues earned by foreign digital companies in India.
• Large multinational digital corporations opposed the levy, citing double taxation concerns.

The Global Taxation Landscape:

• International tax efforts sought to close loopholes but lacked consensus on digital taxation.
• The OECD's Base Erosion and Profit Shifting (BEPS) initiative left digital taxation unresolved.
• India was the first country to impose such a tax, despite criticisms of unilateralism. Other countries followed suit, leading the US to intervene.

International Negotiations and the Role of OECD & UN:

• Dispute over profit allocation: US preferred taxation only on residual returns. India advocated for formulary apportionment.
• OECD attempted a consensus-driven approach but faced US influence.
• Growing discontent among developing nations led to UN intervention.
• In 2024, 110 countries supported an UN-led international tax convention.
• The UN’s proposal for a withholding tax on digital services faced obstacles similar to OECD’s.

US Opposition and Trade Disputes:

• In 2020, the US launched investigations under USTR, calling India’s levy discriminatory.
• The US threatened retaliatory tariffs, leading to India’s withdrawal of a similar levy of 2% on digital e-commerce supplies and services.
• With Donald Trump’s return, trade tensions resurfaced, likely prompting the 6% levy’s removal.

Impact and Future of Digital Taxes:

• India collected ₹40 billion from the levy in 2022.
• Critics argue the tax burden was passed on to consumers, though evidence is lacking.
• The withdrawal raises concerns as there is still no global tax framework in place.
• Despite its discontinuation, the equalisation levy showcased India’s ability to assert its economic interests independently of global consensus.

Conclusion:

• The withdrawal of the equalisation levy marks the end of India’s bold attempt to tax digital giants in the absence of a global consensus.
• While the levy served as an effective tool to ensure fair taxation, geopolitical pressures, particularly from the US, played a crucial role in its rollback.
• The episode highlights the complexities of international tax diplomacy, where developing nations like India must navigate economic interests while asserting their sovereignty.
• As global negotiations continue, the future of digital taxation remains uncertain, but India's pioneering approach has set a precedent for alternative models of taxation beyond OECD-driven frameworks.