What Happened
- The US claimed India will remove its digital services taxes as part of the India-US trade deal framework announced in February 2026.
- India had already abolished its existing equalisation levies: the 2% e-commerce levy effective 1 August 2024 and the 6% online advertising levy effective 1 April 2025.
- The USTR had previously concluded in January 2021 that India's equalisation levy was discriminatory, explicitly exempting Indian companies while targeting non-Indian firms, with estimated costs to US firms exceeding $30 million annually.
- Despite the abolition of the equalisation levy, India retains other mechanisms to tax foreign digital companies, including the Significant Economic Presence (SEP) framework and 18% GST on Online Information and Database Access or Retrieval (OIDAR) services.
- The White House revised its fact sheet within 24 hours, softening language from India "will remove" digital taxes to India "committed to negotiate" bilateral digital trade rules.
Static Topic Bridges
Equalisation Levy — Origin and Evolution
The Equalisation Levy was India's unilateral measure to address the tax challenges of the digital economy, introduced as an interim solution pending a global consensus through the OECD Base Erosion and Profit Shifting (BEPS) framework. The concept was first recommended by the Committee on Taxation of E-Commerce (chaired by Justice R.V. Easwar, constituted in 2013) and the CBDT Expert Committee on BEPS.
- EL 1.0 (Finance Act 2016, Chapter VIII): 6% on payments exceeding Rs 1 lakh per annum to non-residents for online advertising services; applicable only to B2B transactions
- EL 2.0 (Finance Act 2020, effective 1 April 2020): 2% on consideration received/receivable by non-resident e-commerce operators from e-commerce supply or services, with a threshold of Rs 2 crore annual revenue from India
- The levy was outside the Income Tax Act — not covered by Double Taxation Avoidance Agreements (DTAAs), meaning affected companies could not claim treaty relief or foreign tax credits
- USTR Section 301 investigation (January 2021): found India's levy "discriminatory and unreasonable," noting it explicitly exempted Indian companies
- Abolition timeline: 2% levy ended 1 August 2024; 6% levy scrapped 1 April 2025
Connection to this news: The US claim of India "removing" digital services taxes technically refers to actions already taken, but the trade deal language seeks to prevent any future reimposition and to secure broader digital trade commitments.
OECD/G20 Inclusive Framework — Two-Pillar Solution
The OECD/G20 Inclusive Framework on BEPS, comprising over 140 member jurisdictions including India, agreed in October 2021 to a Two-Pillar Solution to address tax challenges of the digital economy. Pillar One deals with reallocation of taxing rights to market jurisdictions; Pillar Two establishes a global minimum tax of 15%.
- Pillar One (Amount A): Reallocates a portion of residual profits of large MNEs (revenue over EUR 20 billion, profitability above 10%) to market jurisdictions where consumers are located, regardless of physical presence
- Pillar One (Amount B): Standardised return for baseline marketing and distribution activities (simplified transfer pricing)
- Pillar Two (GloBE Rules): Global minimum effective tax rate of 15% on MNEs with revenue above EUR 750 million; India has not yet implemented domestic minimum tax rules under Pillar Two
- The Multilateral Convention (MLC) to implement Pillar One Amount A, opened for signature on 19 September 2024, has not yet achieved sufficient signatories to enter into force
- Under the October 2021 agreement, countries agreed to withdraw unilateral digital services taxes once Pillar One Amount A is implemented — this was the basis for India's EL removal
Connection to this news: The stalling of the OECD Pillar One process has created a vacuum where bilateral deals (like the India-US trade agreement) are becoming the mechanism for resolving digital taxation disputes, rather than the multilateral framework originally envisioned.
Significant Economic Presence (SEP) — Section 9 of the Income Tax Act
Even after abolishing the Equalisation Levy, India retains the Significant Economic Presence (SEP) concept to tax non-resident digital companies. Introduced by the Finance Act 2018 (amending Section 9(1)(i) of the Income Tax Act), SEP creates a deemed business connection in India for non-residents exceeding specified revenue or user thresholds.
- Legal basis: Explanation 2A to Section 9(1)(i) of the Income Tax Act, 1961 (inserted by Finance Act 2018)
- Thresholds (notified May 2021): Aggregate revenue from transactions exceeding Rs 2 crore, OR interaction with 3 lakh or more users in India
- SEP, unlike the Equalisation Levy, falls within the scope of DTAAs — meaning its applicability depends on the specific language of India's tax treaties with each country
- The India-US DTAA (1989, amended by protocol 2006) may limit SEP's applicability to US companies, as the treaty concept of "permanent establishment" typically requires physical presence
- The concept mirrors OECD Pillar One's approach of taxing based on market jurisdiction rather than physical presence
Connection to this news: While the US has focused on the Equalisation Levy in trade negotiations, the SEP framework represents India's backup mechanism for taxing foreign digital companies, and may become a future point of contention if the bilateral digital trade rules seek to constrain all forms of unilateral digital taxation.
Key Facts & Data
- Equalisation Levy 1.0: 6% on online advertising (Finance Act 2016); abolished 1 April 2025
- Equalisation Levy 2.0: 2% on e-commerce (Finance Act 2020); abolished 1 August 2024
- USTR finding (January 2021): India's levy "discriminatory," costs to US firms over $30 million annually
- OECD Inclusive Framework: 140+ members; Two-Pillar Solution agreed October 2021
- Pillar One Amount A threshold: EUR 20 billion revenue, 10% profitability
- Pillar Two global minimum tax: 15% on MNEs with revenue above EUR 750 million
- SEP thresholds: Rs 2 crore revenue or 3 lakh users in India
- India-US DTAA: signed 1989, amended by protocol 2006