Farewell to the Equalisation Levy - A Bold Move in Global Taxation

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.

Q1. What was the rationale behind India's introduction of the Equalisation Levy in 2016?

Ans. India introduced the Equalisation Levy to tax digital advertising revenues earned by foreign tech companies and prevent tax avoidance by bypassing treaty obligations.

Q2. How did the OECD and UN differ in their approach to global digital taxation?

Ans. The OECD attempted a consensus-driven approach influenced by developed nations, while the UN proposed a simpler withholding tax model for digital services.

Q3. Why did the United States oppose India’s Equalisation Levy, and what were its consequences?

Ans. The US viewed the levy as discriminatory against its tech companies, leading to USTR investigations, threats of retaliatory tariffs, and India's eventual withdrawal of the 2% tax.

Q4. What was the significance of India’s Equalisation Levy in the context of international tax diplomacy?

Ans. It demonstrated India’s ability to assert its economic interests through unilateral measures, challenging the dominance of developed nations in global tax negotiations.

Q5. What are the implications of India’s withdrawal of the Equalisation Levy in the absence of a global tax framework?

Ans. The withdrawal raises concerns over tax revenue loss and highlights the continued uncertainty in global digital taxation, leaving developing nations in a weaker negotiating position. 

Source:IE