Equalization Levy on Digital Services: How It Worked, and Why It No Longer Applies

A business paying a foreign ad platform, or a seller on a foreign-owned online marketplace, can still find older articles and even some accounting checklists warning about a 2% or 6% equalization levy that needs to be factored into the payment. Searching for how this actually works today turns up genuinely conflicting answers, some current, most not. The short version: both versions of the equalization levy have been withdrawn, the 2% one from 1 August 2024 and the 6% one from 1 April 2025, and neither applies to a payment made today. Understanding what the levy actually did, though, is still useful, both for anyone closing out older compliance and for understanding what fills the gap it leaves behind.

Why India Introduced a Tax Outside the Income Tax Act Altogether

India's right to tax a foreign company's business profits has traditionally depended on whether that company has a permanent establishment here, a fixed place of business, a dependent agent, or something similar, under both domestic law and India's tax treaties. A search engine selling advertising to Indian businesses, or an overseas marketplace facilitating sales to Indian buyers, could earn substantial revenue linked to India without crossing that threshold at all, since none of it required an office, warehouse, or employee physically based here. Section 195 withholding only applies to a payment that's chargeable to tax in India in the first place, so with no permanent establishment and no other clear taxable connection, a large share of cross-border digital revenue simply fell outside India's reach under the ordinary framework. The equalization levy was a deliberate way around that gap: introduced through the Finance Act rather than the Income Tax Act itself, specifically so it wouldn't be treated as an income tax for treaty purposes, meaning DTAA relief couldn't be claimed against it the way it can against ordinary withholding tax.

The Two Limbs, While They Existed

The levy came in two separate pieces, introduced years apart, aimed at different kinds of digital payments.

The mechanical difference between the two mattered in practice. The 6% levy worked much like a withholding obligation sitting on the Indian payer's shoulders, deducted before the payment went out. The 2% levy instead made the foreign e-commerce operator responsible for computing and depositing the levy itself, based on its own India-linked revenue, which functioned closer to a direct turnover tax on the non-resident than a domestic withholding mechanism.

Who Actually Bore the Cost

Legal liability and economic cost didn't always land on the same party. Under the 6% levy, many contracts with foreign ad platforms guaranteed the platform a fixed net amount, so the Indian payer ended up grossing up the payment to absorb the levy, effectively paying more than the sticker price for the same ad spend. Under the 2% levy, the non-resident operator was legally responsible for depositing it, but plenty of e-commerce and marketplace platforms simply built the cost into their pricing or added it as a visible line item on invoices to Indian sellers and advertisers. Either way, the practical outcome was similar: the cost of the levy tended to flow through to Indian businesses and consumers, regardless of which side of the transaction the law formally placed the obligation on.

Both Limbs Are Now Withdrawn

The 2% e-commerce levy was withdrawn effective 1 August 2024, and the 6% online advertisement levy followed, withdrawn effective 1 April 2025. Neither applies to any transaction from those dates onward. The withdrawal wasn't really a change in tax policy so much as a response to pressure on two fronts. Internationally, the equalization levy was consistently treated by the United States as a unilateral digital services tax targeting American technology companies, drawing formal trade investigations and the threat of retaliatory tariffs, and India wasn't the only country facing that pressure. At the same time, the OECD and G20's broader push toward a coordinated global framework for taxing large digital and consumer-facing businesses made a patchwork of country-specific digital levies harder to justify keeping in place. Withdrawing both limbs was as much a trade and diplomatic decision as a tax one. For anyone with older transactions still working through assessment or dispute, the withdrawal is prospective only: payments made while the levy was in force continue to be governed by the law as it stood at the time.

What Actually Applies to a Digital Payment Now

With the equalization levy gone, cross-border digital payments fall back on the mechanisms it was designed to sit alongside. Section 195 withholding and DTAA analysis apply exactly as they do to any other cross-border payment: if the amount is chargeable to tax in India, whether as royalty, fees for technical services, or business income linked to a permanent establishment, ordinary withholding and treaty relief apply, and where none of those apply, the payment can still fall outside India's taxing rights the same way it did before the levy existed. The other piece is the Significant Economic Presence provision, which creates a business connection for a non-resident based purely on India-linked revenue or user engagement, without needing a physical presence at all. It's been on the books since 2018, but it was written to specifically exclude any income already covered by the equalization levy, so for as long as the levy applied, most of the transactions it covered never really tested the significant economic presence rules in practice. With the levy fully withdrawn, that carve-out has nothing left to exclude, and significant economic presence, carried forward into the Income Tax Act, 2025, with a revenue threshold of Rs 2 crore or engagement with 3 lakh or more Indian users, is now the main domestic mechanism left for reaching a non-resident's India-linked digital revenue.

The important difference from the equalization levy is that significant economic presence operates inside the ordinary income tax and treaty framework, not outside it. Where the levy was deliberately structured so DTAA relief could never apply, a business connection created purely through significant economic presence can potentially still be shielded by a treaty, if the non-resident is eligible for treaty benefits and the specific DTAA's own permanent establishment definition doesn't extend to this kind of presence, which is true of a number of India's older treaties. That gap between domestic law and treaty coverage is a live, unresolved area, and it's the opposite problem from what the equalization levy created: instead of a tax treaty relief could never touch, this is a domestic provision that treaty relief might end up limiting more than intended.

For a business paying a foreign digital vendor today, the practical takeaway is simple: run the standard Section 195 and DTAA checklist, not an equalization levy calculation left over from an older article or template. For a non-resident digital business with meaningful India revenue or user numbers, the more relevant question now is whether significant economic presence creates a business connection, and whether an applicable treaty offers any protection against it, not whether last decade's turnover threshold for the 2% levy still applies. It's also worth remembering this sits entirely outside GST: a foreign digital service provider's GST obligations under India's separate rules for online services haven't changed because of anything discussed here, and shouldn't be confused with a levy that no longer exists.