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Taxation of the Digital Economy and Equalisation Levy for CA Final

Updated 5 October 2026 · Fact-checked

India taxes digital businesses through two routes. Significant economic presence (SEP) deems a non-resident's income to accrue in India once payments exceed ₹2 crore or users number more than 3 lakh. The equalisation levy was a separate tax on digital consideration, now withdrawn: 2% on e-commerce from 1 August 2024 and 6% on online advertisement from 1 April 2025.

Understand Taxation of the Digital Economy and Equalisation Levy

Traditional tax rules need a physical link to a country, such as an office or a fixed place of business. A digital company can sell to millions of Indian users with no office here. Under the old rules, India could tax little or none of that income. This gap is the core problem of digital taxation.

India's first response was the equalisation levy (EL). It is not income tax. It is a levy on the gross payment or consideration, collected under Chapter VIII of the Finance Act, 2016 and its later amendments. Because it is not income tax, tax treaties did not cover it. To avoid double tax, income of the non-resident from the specified services or e-commerce supply on which EL was chargeable is exempt from income tax. The exemption applies only where EL is actually chargeable, that is, only for the periods when the levy applied. The levy provisions of the Finance Act, 2016 refer to the 'previous year' for their thresholds. In an exam, apply the law applicable to your attempt, as notified by ICAI.

India's second response was significant economic presence (SEP). It sits inside the income-deemed-to-accrue-in-India rules. SEP of a non-resident in India means (a) any transaction in respect of goods, services or property carried out by the non-resident with any person in India, including download of data or software, where the aggregate payments in the year exceed ₹2 crore, or (b) systematic and continuous soliciting of business activities or engaging in interaction with more than 3 lakh users in India. Physical presence is not needed. Only the income attributable to these transactions or activities is deemed to accrue or arise in India. The SEP thresholds apply from the financial year 2021-22 onwards.

SEP is a domestic law position only. It is subject to treaty override: where a tax treaty applies, the treaty relief prevails over the domestic provision. Most tax treaties still use the permanent establishment test and do not recognise SEP. A resident of a treaty country without a PE under the treaty can usually claim relief. SEP therefore bites mainly where no treaty applies, or where the treaty itself allows India to tax. This is why the global Pillar One and Pillar Two work matters.

The levy has now been rolled back. The 2% levy on e-commerce supply or services was withdrawn from 1 August 2024. The 6% levy on online advertisement and related specified services was withdrawn for consideration received or receivable on or after 1 April 2025. Both withdrawals follow the move towards a multilateral solution. Levy for earlier periods is still payable and recoverable. Always check the date of the payment or consideration in a question.

Key rules to remember

SEP: transaction limb: Aggregate payments from transactions in India in the year > ₹2 crore; Covers goods, services or property carried out by the non-resident with any person in India, including download of data or software. The test is on the total of payments, and it applies whether or not the non-resident has a place of business in India.
SEP: user limb: Systematic and continuous soliciting of business activities or interaction with users in India > 3 lakh; The prescribed number of users is more than 3 lakh, so exactly 3 lakh users does not meet the limb. The activity must be systematic and continuous.
Income deemed to accrue or arise under SEP: Income deemed to accrue or arise in India = only the income attributable to the SEP transactions or activities; The whole global income is not taxed. The attribution is on the Indian transactions or activities that created SEP. This is a domestic law position, subject to treaty override.
Equalisation levy on online advertisement (withdrawn): EL = 6% × amount paid to the non-resident; Applied to B2B payments by a resident carrying on business or profession, or a non-resident with a PE in India, if payments exceeded ₹1 lakh in the previous year. In force from 1 June 2016. Withdrawn for consideration received or receivable on or after 1 April 2025.
Equalisation levy on e-commerce (withdrawn): EL = 2% × consideration received or receivable by the non-resident e-commerce operator, if that consideration in the previous year exceeded ₹2 crore; Under section 165A of the Finance Act, 2016 (inserted by the Finance Act, 2020), it applied to consideration for e-commerce supply or services made or provided to a resident; to a non-resident in specified cases, namely sale of advertisement that targets an Indian customer or a customer using an Indian IP address, and sale of data collected from a resident or a person using an Indian IP address; and to a person who buys such goods or services using an Indian IP address. It applied to a non-resident e-commerce operator only if the consideration received or receivable in the previous year exceeded ₹2 crore. Applied only from 1 April 2020 to 31 July 2024. Withdrawn from 1 August 2024.
Treatment of income covered by EL: Income from specified services or e-commerce supply on which EL is chargeable = exempt from income tax; This avoids double taxation. The exemption applies only where EL is actually chargeable, so only for the periods when the levy applied. It is not a general exemption for the non-resident's income.

How to solve Taxation of the Digital Economy and Equalisation Levy questions

Use this order for any question on digital taxation. First decide which tool applies, then apply the thresholds and dates.

1Identify the facts: who is the non-resident, what is the supply (goods, services, software, advertisement), and who is the customer or payer.
2Check the date of the payment or consideration. The 6% levy ran from 1 June 2016 and the 2% levy from 1 April 2020 to 31 July 2024. After 31 July 2024 no 2% levy applies. For consideration received or receivable on or after 1 April 2025, no 6% levy applies.
3For SEP, test the transaction limb: add all payments in the year from India and compare with ₹2 crore. Then test the user limb: compare users in India with 3 lakh. More than 3 lakh users meets the user limb; exactly 3 lakh does not.
4If SEP exists, confine the income deemed to accrue or arise in India to the portion attributable to the Indian transactions or activities.
5Check for a tax treaty. SEP is only a domestic law position. If the non-resident is a treaty resident and has no PE under the treaty, the treaty relief generally prevails over SEP.
6For a past-period EL question, apply the rate and threshold: 6% only where the payments exceeded ₹1 lakh in the previous year; 2% on e-commerce consideration only where the operator's consideration in the previous year exceeded ₹2 crore.
7State that income from the specified service or e-commerce supply is exempt from income tax only where EL was actually chargeable for that period, then write the conclusion in one line.

Quickest way: Date, limb, treaty

When to use it: Use this when a case scenario MCQ asks whether a digital payment attracts EL or SEP and you have about two minutes.

Read the date first. Consideration received or receivable on or after 1 April 2025 means no EL of either type.
If the date is between 1 August 2024 and 31 March 2025, only the 6% levy on online advertisement can apply. The 2% e-commerce levy is gone.
If the date is between 1 April 2020 and 31 July 2024, both levies can apply, subject to their conditions.
If the date is between 1 June 2016 and 31 March 2020, only the 6% levy can apply. The 2% levy did not exist. Before 1 June 2016, neither applied.
For SEP, compare ₹2 crore of payments or more than 3 lakh users. Meeting either limb is enough.
If a treaty applies and the question mentions no PE, say the treaty overrides SEP, so SEP will not create tax liability in practice.

Common mistakes in Taxation of the Digital Economy and Equalisation Levy

Applying the 6% or 2% levy on payments made after the withdrawal dates.
Older study notes and textbooks still show the levies as current.
Fix: Always check the date of payment or consideration. Nothing is leviable on consideration received or receivable on or after 1 April 2025. The 2% levy stopped from 1 August 2024.
Applying the 2% levy to a date before 1 April 2020.
Students assume both levies ran together from the start.
Fix: The 6% levy began on 1 June 2016. The 2% levy applied only from 1 April 2020 to 31 July 2024.
Requiring both SEP limbs to be satisfied together.
Students read the two limbs as a single combined test.
Fix: The limbs are alternatives. Either the payments exceed ₹2 crore or the users exceed 3 lakh.
Taxing the entire global profit of the non-resident under SEP.
The word 'deemed to accrue' is read as covering all income.
Fix: Only the income attributable to the Indian transactions or activities is deemed to accrue or arise in India.
Calling EL an income tax and claiming a foreign tax credit or treaty relief on it.
The levy is paid by non-residents on payments for services, which looks like withholding tax.
Fix: EL is a separate levy on the payment, outside the income tax and treaty framework. Income from the specified service or e-commerce supply on which EL is chargeable is exempt from income tax, only for the periods when the levy applied.
Assuming SEP always overrides a tax treaty.
Domestic law deems income to accrue, so students assume tax follows.
Fix: SEP is a domestic law position subject to treaty override. Treaty relief usually still applies because treaties use the PE test. Mention the treaty position in the answer.
Saying EL applies to payments of any size, or to payments between non-residents.
The conditions for the 6% levy are forgotten.
Fix: The 6% levy applied only to B2B payments above ₹1 lakh in the previous year to a non-resident service provider, paid by a resident carrying on business or profession or a non-resident with a PE in India.

Worked examples

Example 1

A foreign streaming company with no office in India sells subscriptions to Indian users. In the financial year 2023-24 it receives ₹1,80,00,000 from Indian subscribers. It has 4,20,000 Indian users. The company is resident in a country with no tax treaty with India. Does it have a significant economic presence in India?

Show the solution

SEP thresholds apply from the financial year 2021-22 onwards, so 2023-24 is covered.
Test the transaction limb: the aggregate payments of ₹1,80,00,000 are below ₹2 crore. This limb is not met.
Test the user limb: the company has systematic and continuous interaction with 4,20,000 users, which is more than 3 lakh. This limb is met.
One limb is enough, so SEP exists, even with no office in India.
Only the income attributable to the Indian activities is deemed to accrue or arise in India.
There is no treaty, so no treaty relief is available against SEP. If a treaty had applied, it would have overridden this domestic law position.

Answer: The company has SEP in India through the user limb. Only the income attributable to its Indian activities is deemed to accrue or arise in India, and with no treaty no treaty relief applies.

Example 2

Resident company A, carrying on business, pays ₹8,00,000 to a foreign social media platform for online advertisement. The payment is made, and the consideration is received or receivable by the platform, on 10 December 2024. A makes a further payment of ₹12,00,000 for similar advertisement, with consideration received or receivable on 15 May 2025. Compute the equalisation levy, if any, assuming the 6% levy applied as it stood at that time.

Show the solution

The 6% levy was withdrawn for consideration received or receivable on or after 1 April 2025. So only the payment of 10 December 2024 is in scope.
Check the threshold: this payment falls in the previous year 2024-25. The in-scope payments to the platform in that year total ₹8,00,000, which is more than ₹1 lakh, so the levy applies.
Compute: 6% × ₹8,00,000 = ₹48,000.
The May 2025 payment falls in 2025-26 and its consideration is received or receivable on or after 1 April 2025. It is outside the levy, so no levy applies and it does not enter the ₹1 lakh test.
The platform's income from this advertisement service, on which the levy was chargeable, is exempt from income tax, because the levy applied for that period.

Answer: The equalisation levy is ₹48,000 on the payment of 10 December 2024. The May 2025 payment attracts no levy.

Exam tips

Learn the withdrawal dates cold: 1 August 2024 for the 2% e-commerce levy and 1 April 2025 for the 6% levy. Also remember the start dates: 1 June 2016 for 6% and 1 April 2020 for 2%. Examiners can build a whole MCQ on the date alone.
In descriptive answers, structure as: problem of PE-based taxation, India's two responses (SEP and EL), their limits, and the withdrawal. This earns marks for context.
In SEP cases, always write both limbs and say which is met. Then say what income is taxed (attributable income only).
Mention treaty position and the link to Pillar One as a closing line in 6-mark answers.
In EL questions, remember that the Finance Act, 2016 levy provisions speak of the 'previous year' for thresholds. Exam questions follow the law applicable to your attempt, as notified by ICAI, so check the study material and amendments for your sitting.

Practice questions from Latest Developments in International Taxation

Taxation of the Digital Economy and Equalisation Levy in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA FinalEqualisation Levy and Taxation of Digital Economy

Taxation of the Digital Economy and Equalisation Levy: frequently asked questions

Is the equalisation levy still applicable?

No, not for new payments. The 2% levy on e-commerce was withdrawn from 1 August 2024. The 6% levy on online advertisement was withdrawn for consideration received or receivable on or after 1 April 2025. Levy for earlier periods stays payable and recoverable.

What are the thresholds for significant economic presence?

Payments from transactions in India above ₹2 crore in the year, or systematic and continuous interaction with more than 3 lakh users in India. Either one is enough. Physical presence is not needed.

Why was the equalisation levy withdrawn?

The withdrawals are linked to the move towards a multilateral solution on taxing the digital economy under the OECD/G20 framework. In your answer, link it to Pillar One.

Does SEP apply if a tax treaty exists?

SEP is a domestic law position and is subject to treaty override. Most treaties test permanent establishment and do not recognise SEP, so a non-resident from a treaty country without a PE can generally claim relief. SEP bites mainly where no treaty applies.