India withdraws digital tax and global talks continue

Source: The post India withdraws digital tax and global talks continue has been created, based on the article “A tax that served India’s interests – no more” published in “Indian Express” on 28 March 2025. India withdraws digital tax and global talks continue.

UPSC Syllabus Topic: GS Paper3- Economy- Taxation

Context: India has decided to withdraw the 6% equalisation levy on online advertising, introduced in 2016. This move revives discussions on the challenges of taxing digital companies. The article explores the evolution of the levy, international responses, negotiations for a global tax framework, and the political-economic factors influencing India’s recent decision.

India’s Equalisation Levy

1. Targeting Digital Firms: The levy aimed at foreign digital companies earning significant revenues from India, which were not paying taxes domestically.
2. Avoiding Treaty Override: Introduced through the Finance Act rather than the Income-tax Act, the levy was designed to avoid conflicts with existing tax treaties. This prevented companies from using treaty protections to evade this tax.
3. Setting a Precedent: India led by example in taxing digital transactions as international guidelines from bodies like the OECD were unclear and lacked consensus.
4. Tax Compliance: Despite their substantial market presence, many multinational digital firms reported low tax payments globally. The levy sought to ensure these companies contributed fairly to India’s tax revenues.
5. Revenue Generation: By 2022, the levy had generated approximately Rs 40 billion, highlighting its effectiveness as a fiscal tool.

For detailed information on Equalisation Levy read this article here

Global tax system respond to digital taxation

1. The OECD tackled digital taxation under the Base Erosion and Profit Shifting (BEPS) project but failed to produce a definitive solution, leaving multiple options on the table.
2. India pioneered by introducing a unilateral 6% equalisation levy in 2016, targeting revenues from foreign digital companies operating in India, which was met with international concern.
3. Global negotiations saw conflicting interests, especially between the US and India. The US favored taxing only surplus profits, while India advocated for taxing profits based on market size.
4. The OECD’s prolonged negotiations without consensus led developing nations to support a new UN-led international tax convention in 2024, though achieving consensus remained challenging.

UN role in global digital tax reforms

1. The UN provided an alternative platform for global digital tax discussions when OECD progress was slow.
2. In 2024, the UN gained strong backing from 110 countries for establishing an international tax convention.
3. The UN tax committee proposed a simple withholding tax on digital service payments to prevent double taxation.
4. This withholding tax aimed to introduce fairness and simplicity into the international taxation of digital companies.
5. However, achieving consensus on the UN proposal proved challenging, mirroring the difficulties faced by the OECD.

Reasons for withdrawal of Equalisation Levy

1. U.S. Pressure: In 2020, the U.S. declared India’s 2% extension of the levy as discriminatory, threatening retaliatory tariffs. To avoid these tariffs, India retracted the 2% tax.
2. Political Change in the U.S.: The return of Donald Trump as President intensified pressures, leading India to reconsider the levy to mitigate trade tensions.
3. Absence of Global Tax Agreement: The withdrawal occurred in a context where no global consensus on digital taxation had been reached, making unilateral measures like the levy more contentious.
4. Economic Impact: The levy, generating Rs 40 billion in 2022, was critiqued for causing double taxation and increasing costs for consumers.

Conclusion

While criticised, the equalisation levy generated Rs 40 billion in 2022 and was a bold assertion of India’s tax sovereignty. Its withdrawal amid the absence of a global tax solution raises concerns. The levy remains a symbol of how developing nations can assert fiscal rights through domestic action despite global resistance.

Question for practice:

Examine the reasons behind India’s decision to withdraw the 6% equalisation levy on digital advertising and its implications for global digital tax reforms.