1. Equalisation Levy: India Digital Tax
India introduced the Equalisation Levy (EL) in 2016 to tax digital economy transactions by non-resident companies that derive revenue from India but have no taxable presence (Permanent Establishment) under traditional income tax rules. The levy operates outside the Income Tax Act -- as a separate statute -- but interacts closely with ITA 2025 through the income tax exemption for income on which EL is paid. Understanding equalisation levy is essential for Indian businesses advertising online and for non-resident digital service providers operating in India.
2. Two Categories of Equalisation Levy
The Equalisation Levy has covered two categories -- one still active, one recently abolished:
| Category | Rate | Status | Applicability |
|---|---|---|---|
| Digital advertising (Chapter VIII, EL Act 2016) | 6% | Active | Payments to non-residents for online advertising |
| E-commerce operator (Finance Act 2020 amendment) | 2% | Abolished from 1 April 2025 | Was applicable on consideration from e-commerce supply/services by non-resident operators |
3. The 6% Digital Advertising Levy: Who Pays, What For
The 6% equalisation levy on digital advertising applies when:
- An Indian business (or a non-resident with a PE in India) makes a payment to a non-resident
- For specified services: online advertisement, provision and maintenance of digital advertising space, and any other provision of digital advertising facilities/services
- Threshold: Rs 1,00,000 per year from a single non-resident provider
- Common examples: Google Ads (paid to Google LLC or Google Ireland), Meta Ads (Facebook/Instagram campaigns paid to Meta Platforms Ireland), LinkedIn Ads, Twitter/X Ads
4. Mechanics: How Equalisation Levy Works
The Indian business (payer) is responsible for:
- Identifying that the payment is to a non-resident for digital advertising services
- Deducting 6% equalisation levy from the payment (Google receives 94%)
- Depositing the levy by the 7th of the following month (same as TDS)
- Filing Annual Equalisation Levy Return (Form 1) by 30 June following the end of the financial year
- Interest at 1% per month for late deposit
- Penalty: Rs 1,000 per day for failure to file annual return
5. Income Tax Exemption: Section 10(50) Equivalent
The income of a non-resident from services on which equalisation levy has been paid is exempt from Indian income tax under the Section 10(50) equivalent of ITA 2025. This prevents double taxation -- the non-resident does not pay both 6% EL and income tax on the same digital advertising revenue. The exemption ensures EL is the only Indian tax on qualifying digital advertising income of non-residents.
6. What Happens If EL Is Not Deducted?
If an Indian business pays digital advertising fees to a non-resident without deducting 6% equalisation levy:
- The expense paid (to the extent of equalisation levy not deducted) is disallowed as a business expense under ITA 2025
- Interest at 1% per month on the undeducted levy amount
- Penalty for non-deduction or non-payment
- This is analogous to TDS non-deduction consequences -- the expense disallowance is the primary financial impact
7. DTAA and Equalisation Levy
A key question is whether DTAA (Double Taxation Avoidance Agreements) can override the equalisation levy -- allowing non-residents to claim the benefit of their country DTAA with India. The position under Indian law is nuanced:
- Equalisation Levy is not income tax -- it is a separate indirect tax-like levy
- DTAAs apply to income taxes -- technically not to EL
- However, some foreign companies have challenged EL applicability under DTAA provisions
- The issue remains subject to litigation and government policy evolution
8. Practical Compliance for Indian Advertisers
For Indian businesses advertising on Google, Meta, LinkedIn, and other international platforms:
- When paying Google/Meta invoices: deduct 6% before payment (pay 94% of invoice amount)
- Deposit the 6% to the government by 7th of the next month
- Maintain a register of all equalisation levy payments
- File Form 1 (Annual EL Return) by 30 June
- The Rs 1,00,000 annual threshold is per non-resident service provider -- Google Ads and Meta Ads are separate providers, each with their own Rs 1L threshold
9. The Abolition of 2% E-Commerce Levy
The 2% equalisation levy on e-commerce operators (non-resident e-commerce companies like Amazon, Flipkart foreign entity) was abolished from 1 April 2025. This removal was welcomed by global e-commerce companies and aligned India closer to the OECD Pillar One framework for taxing digital businesses. The 6% digital advertising levy remains in force. Indian businesses should continue complying with 6% EL on digital advertising payments to non-resident platforms.
10. Why TaxClue
Equalisation levy compliance -- identifying applicable payments, deduction mechanics, monthly deposit, and annual return filing -- is separate from income tax compliance but equally important. TaxClue handles EL compliance for businesses advertising on international platforms. Contact us under ITA 2025.