Equalization Levy — India's Digital Tax

By CA V. Viswanathan — FCA, ACS, CFE, IBBI Registered Valuer (IBBI/RV/03/2019/12333). Updated for FY 2025-26.

Equalization Levy, popularly called 'Google Tax', was introduced by the Finance Act 2016 to tax revenues earned by foreign digital companies from Indian customers. It operates outside the Income Tax Act and is governed by Chapter VIII of the Finance Act 2016. Two regimes: (1) 6% on specified services — online advertising, digital advertising space, etc. — paid by Indian businesses to non-resident service providers (continues to apply); (2) 2% on e-commerce supply or services by non-resident e-commerce operators — introduced in 2020 and abolished from 1 August 2024 by the Finance (No. 2) Act 2024. This page covers the still-active 6% specified-services levy.

Scope of the 6% Specified Services Levy

Section 165 of the Finance Act 2016 imposes 6% Equalization Levy on consideration received by a non-resident, not having a permanent establishment (PE) in India, for 'specified services' from: (a) a person resident in India and carrying on business or profession; or (b) a non-resident having a PE in India. 'Specified services' means online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement. Examples in scope: payments to Google Ads, Facebook Ads, LinkedIn Ads, Twitter Ads, YouTube ads, Bing, Yahoo, regional ad networks, programmatic exchanges, retargeting platforms.

Threshold and Compliance Mechanics

Threshold: ₹1 lakh in aggregate per non-resident provider per financial year. Once crossed, levy applies to the full consideration including the first ₹1 lakh. The Indian payer (deductor) deducts 6% and deposits to the credit of the Central Government by the 7th of the following month. A statement in Form 1 must be filed annually by 30 June following the financial year. Failure to deduct: interest at 1% per month (Section 170) and penalty under Section 171. Failure to file Form 1: late fee at ₹1,000/day.

Critical Deductibility Rule

Section 40(a)(ib) disallows the entire expense for the year if Equalization Levy is not deducted and deposited within the financial year. Unlike TDS provisions where late deduction can still be allowed (with interest), Equalization Levy non-compliance triggers permanent disallowance of the underlying expense for the year — only allowable in the year of actual deduction and deposit. For an Indian advertiser spending ₹2 crore/year on Google Ads, missing Equalization Levy compliance can convert the entire ₹2 crore into non-deductible expense, costing ~₹52 lakh in additional tax.

Interplay with DTAA and Income Tax Act

Equalization Levy is NOT a tax under the Income Tax Act — it is a separate cess under Chapter VIII of Finance Act 2016. Therefore, it is generally outside the scope of India's tax treaties (DTAAs). The non-resident cannot claim foreign tax credit in their home country (typically) and cannot invoke DTAA to escape the levy. The corresponding income is, however, exempt under Section 10(50) of the Income Tax Act in the hands of the non-resident, avoiding double Indian taxation. This non-treaty status has been a contentious issue with the US, EU and OECD, and Pillar One/Two negotiations (BEPS 2.0) may eventually replace it.

Practical Compliance for Indian Businesses

(1) Identify all foreign digital advertising vendors in your AP system; (2) confirm absence of Indian PE (Google, Meta, LinkedIn, Twitter generally do not have a PE for advertising income); (3) compute monthly liability and deposit by 7th; (4) maintain an Equalization Levy register; (5) file Form 1 by 30 June annually; (6) ensure expense is deducted and deposited before 31 March of the relevant financial year (not the following year as for TDS); (7) coordinate with the foreign vendor — many require gross-up arrangements where the Indian payer bears the levy.

Common Mistakes

(1) Treating Equalization Levy as TDS and following the next-FY deposit window — this triggers full Section 40(a)(ib) disallowance. (2) Missing levy on small ad-spend with credit-card payments to overseas providers (Stripe, Substack, ConvertKit) where ad component is bundled. (3) Failing to maintain documentation of vendor's no-PE status. (4) Treating the levy as borne by the vendor when contracts are silent — typical SaaS contracts make the customer liable for any local taxes. (5) Confusing the abolished 2% e-commerce levy (gone from 1 Aug 2024) with the still-active 6% specified-services levy.

How Virtual Auditor Delivers This

Virtual Auditor's CA-CS-IBBI Valuer team handles equalization levy — india's digital tax as an integrated engagement — no hand-offs between firms, single point of accountability, fixed-fee transparency. CA V. Viswanathan (FCA, ACS, CFE, IBBI RV) personally reviews every engagement deliverable. Offices in Chennai, Bangalore, and Mumbai serve clients across India. Free 30-minute scoping consultation available — no obligation.

Get Started — Free Consultation

Call +91 99622 60333 or email support@virtualauditor.in to schedule a free 30-minute consultation with CA V. Viswanathan. No obligation. We will give you a clear scope, timeline, and fixed-fee quote within 24 hours of the call.