Equalisation Levy 2% Repeal & Transition: Pillar One Amount A Readiness for Foreign Digital Businesses in India
The taxation of the cross-border digital economy in India entered a transformative phase following the enactment of the Finance (No. 2) Act, 2024. In a decisive structural reform aligning with OECD Inclusive Framework commitments, the Indian Government formally abolished the controversial 2% Equalisation Levy (EL) on non-resident e-commerce operators, with effect from 1st August 2024.
While the elimination of the 2% levy represents a major administrative relief for foreign digital platforms, SaaS providers, and global marketplaces, it does not mark the end of Indian tax scrutiny. Instead, the withdrawal shifts foreign tech enterprises directly into the statutory ambit of Significant Economic Presence (SEP) under Section 9(1)(i) of the Income-tax Act, 1961, while intensifying non-resident withholding tax obligations under Section 195.
Legislative Evolution: What Changed Under Finance Act 2024
To assess compliance exposures, corporate legal and tax teams must evaluate which levies were eliminated and which remain active:
Abolished: 2% E-Commerce Equalisation Levy (Section 165A): Introduced in 2020, this 2% levy applied to gross consideration received by non-resident e-commerce operators from online sale of goods or provision of services to Indian residents, persons using Indian IP addresses, or non-residents in specified cases. The Finance (No. 2) Act, 2024 statutorily terminated Section 165A effective 1 August 2024.
Retained: 6% Online Advertising Equalisation Levy (Section 165): The original 6% Equalisation Levy introduced under the Finance Act, 2016 remains fully operational. It applies to gross consideration paid to non-resident entities for online advertisement, provision for digital advertising space, or any other facility or service for online advertising, provided the annual payments from an Indian resident business exceed ₹1,00,000.
Pillar One Amount A Transition: The withdrawal of the 2% EL fulfills India's transitional commitment under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), which requires signatory jurisdictions to withdraw unilateral Digital Services Taxes (DSTs) upon the implementation of the Pillar One Multilateral Convention (MLC).
The Immediate Transition: Shift to Significant Economic Presence (SEP)
During the tenure of the 2% Equalisation Levy, transactions subject to EL enjoyed a statutory income-tax exemption under Section 10(50) of the Income-tax Act. With the repeal of Section 165A, this protective umbrella ceased to exist.
Consequently, all non-resident digital enterprises operating in India must now be evaluated under the domestic Significant Economic Presence (SEP) provisions of Section 9(1)(i):
₹2 Crore Revenue Threshold: Any non-resident generating more than ₹2 Crore in aggregate annual revenue from transactions involving goods, services, software downloads, or data provision with Indian customers triggers an Indian business connection. Review the operational mechanics in our comprehensive guide on Significant Economic Presence (SEP) & Equalisation Levy.
300,000 User Threshold: Engaging in systematic and continuous business activities or soliciting business through digital interaction with 300,000 or more Indian users establishes a digital taxable presence, irrespective of where contracts are concluded.
Withholding Tax Ramifications under Section 195
Perhaps the most disruptive operational consequence of the EL repeal falls upon Indian corporate buyers and payers:
Re-emergence of TDS Obligations: Under the 2% EL regime, Indian customers were exempt from deducting tax at source on e-commerce transactions. Following the repeal, payments to foreign SaaS and software providers must be scrutinized under Section 195 for tax withholding.
Characterization Disputes (Royalty vs Business Profits): The Indian tax administration routinely contends that cloud services, automated database access, and SaaS subscriptions constitute "Royalty" or "Fees for Technical Services" (FTS) under Section 9(1)(vi)/(vii). While the landmark Supreme Court ruling in Engineering Analysis Centre of Excellence held that standard shrink-wrapped and distributor software does not constitute royalty under tax treaties, assessing officers continue to issue withholding demands where treaty relief is contested.
Mandatory Documentation for Treaty Relief: To avail of treaty benefits under Section 90(2) (such as classifying revenue as business profits exempt from Indian tax in the absence of a PE), the foreign vendor must furnish a valid Tax Residency Certificate (TRC) alongside electronic Form 10F Electronic Filing & TRC Verification.
Lower Withholding Certificates: In contentious cases, foreign service providers frequently apply for a Nil or Lower Deduction Certificate under Section 197 via Section 195 NRI Tax Withholding & Form 13 Lower Deduction to ensure frictionless inward collections.
Strategic Roadmap for Multinational Tech Enterprises
To navigate the post-Equalisation Levy landscape without incurring retrospective tax exposure or customer friction, international technology groups must execute four strategic initiatives:
Review Billing and Contract Terms: Update standard customer contracts to clarify that fees are exclusive of Indian withholding taxes, or embed clear gross-up mechanisms where treaty documentation cannot be furnished immediately.
Establish Comprehensive Treaty Dockets: Procure annual Tax Residency Certificates from home jurisdiction revenue authorities and maintain electronic Form 10F filings on the Indian income-tax e-filing portal.
Evaluate OECD Pillar One Impact: Monitor the ratification of the Multilateral Convention for Amount A of Pillar One, which will establish multilateral profit allocation keys for enterprise groups with global revenues exceeding €20 Billion and profitability over 10%.
Coordinate with Transfer Pricing Certifications: Ensure cross-border software distribution and marketing affiliate remunerations reflect robust arm's-length benchmarking in Form 3CEB filings.
For specialized advice on digital economy taxation, cross-border treaty defense, and non-resident withholding certifications, learn more About PGT & Associates and explore our dedicated Transfer Pricing & International Tax Services.
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