Direct Tax Laws & International Taxation · Taxation of Digital Transactions

Equalisation Levy and Digital Service Taxes for CA Final

Updated 5 October 2026

Equalisation levy was a separate Finance Act, 2016 tax on digital businesses of non-residents: 6% on specified services such as online advertising and 2% on e-commerce supply or services. It is not income tax, and income taxed under it was exempt from income tax. Both levies are now abolished for new consideration. Check the date first.

Understand Equalisation Levy and Digital Service Taxes

Traditional tax rules tax a non-resident only if income arises in India through a business connection, a permanent establishment (PE) or a similar nexus. A foreign digital company can earn large sums from Indian users with no office or staff in India. Under most treaties, its business profits are then taxable only in its home country. The equalisation levy was India's answer to this gap.

The levy was introduced by Chapter VIII of the Finance Act, 2016, with effect from 1 June 2016. It is not a tax on income. It is a levy on the consideration (gross receipts), charged outside the income tax law. It sat outside the Income-tax Act, 1961, which governed the years in which the levies operated. It likewise sits outside the Income-tax Act, 2025, which applies from 1 April 2026. India's position was that the levy therefore fell outside the treaty network, which covers taxes on income. Do not call it a tax on profit.

There were two levies. First, a 6% levy on specified services: online advertisement, provision of digital advertising space or any facility for online advertisement, and other notified services. It applied to payments by a resident carrying on business or profession (or a non-resident with a PE in India) to a non-resident without a PE in India. It did not apply if the specified service was availed other than for the payer's business or profession, or if the aggregate payments to one provider in the year did not exceed ₹1 lakh. The payer had to deduct it. Second, a 2% levy on e-commerce supply or services, inserted by the Finance Act, 2020 and applicable from 1 April 2020. It applied to a non-resident e-commerce operator running a digital or electronic facility for online sale of goods or services. It covered the sale of goods or provision of services to a person resident in India, to a person who buys using an Indian IP address, and the sale of advertisement-related data to such persons. It applied only if the consideration received or receivable in the year exceeded ₹2 crore, and once it applied, it was charged on the whole consideration, not only on the excess. The operator, not the buyer, was liable to pay it.

To avoid double taxation, income chargeable to the levy was exempt from income tax under section 10(50) of the Income-tax Act, 1961. That section exempted income arising from specified services (from 1 June 2016) and from e-commerce supply or services (from 1 April 2020) that was chargeable to the levy. The levy did not apply where the non-resident had a PE in India and the supply was effectively connected with it. The 2% levy also did not apply to consideration already chargeable to the 6% levy.

The levies have since been withdrawn. The 2% levy on e-commerce stopped from 1 August 2024 (Finance Act, 2024). The 6% levy on specified services stopped from 1 April 2025 (Finance Act, 2025). For consideration after those dates, ordinary income tax rules apply again. These include the rules on income deemed to accrue in India, significant economic presence, royalty and fees for technical services, and the treaty. Past periods still matter for assessments, penalties and exam questions framed on old facts. Read the date in the question carefully.

Key rules to remember

Levy on specified services: EL = 6% × consideration for specified services; Applied only if aggregate payments to one non-resident provider in the year exceeded ₹1 lakh. Payer deducts it. In force from 1 June 2016. Stopped for consideration from 1 April 2025.
Levy on e-commerce supply or services: EL = 2% × consideration received or receivable for e-commerce supply or services; Inserted by the Finance Act, 2020, from 1 April 2020. Covered sale of goods or provision of services to a person resident in India, to a person who buys using an Indian IP address, and sale of advertisement-related data to such persons. Applied only if consideration received or receivable in the year exceeded ₹2 crore. Once it applied, it was charged on the whole amount, not only the excess. Operator is liable. Stopped from 1 August 2024.
Who is outside the levy: Non-resident with PE in India and supply effectively connected with PE → no levy; For the 2% levy, also no levy on consideration already chargeable to the 6% levy. For the 6% levy, also no levy if the specified service is availed other than for the payer's business or profession, or if the aggregate payments in the year do not exceed ₹1 lakh.
Relationship with income tax: Income taxed under EL → exempt from income tax; No double tax. Section 10(50) of the Income-tax Act, 1961 exempts income arising from specified services (from 1 June 2016) and from e-commerce supply or services (from 1 April 2020) that is chargeable to the levy. It covers the income covered by the levy, not the levy itself. After abolition, the normal tax rules apply.
Nature of the levy: EL = levy on gross consideration; not tax on income; Charged under the Finance Act, 2016, not under the Income-tax Act, 1961 or the Income-tax Act, 2025 (which applies from 1 April 2026). Not creditable as a tax on income under a DTAA, as the Indian position goes.

How to solve Equalisation Levy and Digital Service Taxes questions

Use this order for any equalisation levy question, whether theory or a case scenario.

1Fix the date of the consideration. If it is on or after 1 April 2025 for specified services, or 1 August 2024 for e-commerce, no levy is chargeable. Shift to income tax and treaty analysis.
2Identify the parties. Check that the recipient is a non-resident and whether it has a PE in India.
3Classify the receipt: online advertisement and similar specified services (6%), or e-commerce supply or services (2%). If the consideration is chargeable to the 6% levy, it falls outside the 2% levy.
4Test the threshold: more than ₹1 lakh in aggregate for specified services per provider per year, more than ₹2 crore for e-commerce supply.
5For the 6% levy, check the payer is a resident in business or profession, or a non-resident with a PE, and that the service is availed for that business or profession. For the 2% levy, check the sale or service is to a person resident in India or to a person who buys using an Indian IP address, or is a sale of advertisement-related data to such persons.
6Apply the rate to the full consideration and state who is liable: the payer deducts at 6%, the operator pays at 2%.
7State the income tax effect: income covered by the levy is exempt from income tax. Add that the levy is a separate charge outside the treaty.

Quickest way: Date, nature, threshold, PE

When to use it: Use it for short MCQs and for the opening lines of a descriptive answer.

Date: is the consideration before or after the cut-off?
Nature: advertisement and similar services (6%) or e-commerce supply (2%).
Threshold: ₹1 lakh or ₹2 crore.
PE: if a PE exists and the supply connects to it, no levy.
Compute and state the exemption from income tax.

Common mistakes in Equalisation Levy and Digital Service Taxes

Calling the equalisation levy a tax on income.
It sounds like a digital tax paid by non-residents, so students treat it as income tax.
Fix: Write that it is a levy on gross consideration under the Finance Act, 2016, outside the Income-tax Act, 1961 (and the Income-tax Act, 2025).
Applying the levy to facts after the abolition dates.
Students memorise the old rules and do not read the date in the question.
Fix: Check the date first. From 1 April 2025 (specified services) or 1 August 2024 (e-commerce), no levy applies and ordinary tax rules govern.
Charging the 2% only on the excess over ₹2 crore.
Students confuse a threshold with an exemption limit.
Fix: The threshold decides whether the levy applies at all. If crossed, the levy applies on the whole consideration. Below it, there is none.
Charging both 6% and 2% on the same receipt.
The same platform may sell ads and goods.
Fix: Split the receipts by nature. Consideration already within the 6% levy falls outside the 2% levy.
Taxing the same income under both the levy and income tax.
Students forget the exemption for income covered by the levy.
Fix: State that income chargeable to the levy is exempt from income tax, so there is no double charge.
Claiming the levy as foreign tax credit or treaty relief.
Students assume every tax on a non-resident is covered by the treaty.
Fix: Say the levy is outside the income tax charge and not a tax on income for treaty purposes, as India treats it.

Worked examples

Example 1

A US company with no PE in India provides online advertising to an Indian manufacturing company. In March 2024, the manufacturer pays it ₹40,00,000 for advertisements on its platform. The company has received no other payments from India that year. Work out the equalisation levy and the income tax position.

Show the solution

The date is March 2024, before 1 April 2025, so the 6% levy was still in force.
The recipient is a non-resident with no PE, and the payer is a resident in business availing the service for its business. The service is online advertisement, a specified service.
The payments exceed ₹1 lakh, so the levy applies.
Levy = 6% × ₹40,00,000 = ₹2,40,000.
The manufacturer must deduct and deposit ₹2,40,000 and pay the balance of ₹37,60,000 to the company.
The income is covered by the levy, so it is exempt from income tax in the company's hands.

Answer: Equalisation levy is ₹2,40,000, deducted by the payer. The income is exempt from income tax. For consideration paid on or after 1 April 2025, the levy would not apply.

Example 2

A Singapore company with no PE in India runs an online marketplace. In the year ended 31 March 2023, it received ₹5,00,00,000 as consideration from supplies of goods to Indian residents through its platform. It received nothing for advertising. A second foreign marketplace received only ₹1,80,00,000 from India in the same year. Work out the equalisation levy for both.

Show the solution

The year ended 31 March 2023 is before 1 August 2024, so the 2% levy applied.
Both are non-resident e-commerce operators without a PE. The supplies are e-commerce supply to Indian residents.
For the first company: ₹5,00,00,000 exceeds ₹2 crore, so the levy applies to the whole amount.
Levy = 2% × ₹5,00,00,000 = ₹10,00,000, payable by the operator.
The income is exempt from income tax.
For the second company: ₹1,80,00,000 is below ₹2 crore, so no levy applies. Its Indian income is tested under ordinary tax rules and the treaty.

Answer: First company: levy of ₹10,00,000 and income exempt from income tax. Second company: no levy, and ordinary tax rules apply.

Exam tips

Read the date in every question. A question may test whether you know that the levies are now withdrawn.
In descriptive answers, use provision, facts, conclusion: name the levy, apply the threshold and PE test, then state the income tax exemption.
Learn the contrast between the levy and income tax: base (gross consideration versus income), law (Finance Act versus Income-tax Act) and treaty position.
Scenario MCQs often test the threshold, the full-amount point, or who is liable. Practise these three.
Link this topic to BEPS Action 1 and Pillar One. A good answer explains why India introduced the levy and why it was withdrawn.

Practice questions from Taxation of Digital Transactions

Equalisation Levy and Digital Service Taxes: frequently asked questions

What is the difference between equalisation levy and income tax?

Income tax is charged on income under the Income-tax Act, 2025. The equalisation levy was charged on gross consideration under the Finance Act, 2016, and had no deductions for expenses. Income covered by the levy was exempt from income tax.

Is the equalisation levy still applicable?

No. The 2% levy on e-commerce stopped from 1 August 2024, and the 6% levy on specified services from 1 April 2025. Earlier periods may still matter for compliance and for exam questions set on those years.

Does the equalisation levy apply if the non-resident has a PE in India?

No. For both levies, the levy did not apply where the non-resident had a PE in India and the service or supply was effectively connected with that PE. Such income is taxed as business income of the PE.

Is equalisation levy covered by a tax treaty?

India treated the levy as outside the treaties, since it is not a tax on income. This view was contested by some countries. For the exam, state it as India's position and keep your answer to the Indian law.

What replaces the levy after abolition?

The ordinary rules apply. These cover income deemed to accrue in India, significant economic presence, royalty and fees for technical services, and the treaty. Pillar One is the global long-term solution.