Taxation of revenue from digital advertising:
Below is the time line of levy from imposition till date
On 1st June 2016:
On 1st April 2020:
Introduction of Concept of SEP nexus
What is Pillar One framework?
India introduced equalization levy in 2016. Also, India joined the Inclusive Framework for international tax reforms in 2016. So, India could have delayed the implementation of equalization levy or could have chose not to introduce it all, right?
The concept of taxing revenue from digital advertising, began in 2016 when the Indian government introduced the Equalization Levy. Digital technology based services have undergone rapid and significant expansion in last decade in India, opening world of digital supply of goods/services. This has made non-resident companies earn significant revenue from Indian users, even without physical presence in India.
In order to tax these foreign digital companies earning from Indian users without a physical presence, and ensure fair taxation in the digital economy, government introduced the equalization levy.
India became the first country to impose a 6% Equalization Levy on payments made by resident advertisers to non-resident companies rendering online advertising services even without having a physical presence in India
Equalization Levy was a direct tax on gross payments, structured as withholding tax, where the resident advertiser must remit 2% of the invoice direct to the tax authorities.
This targeted platforms like Google ads and Facebook that earned ad revenue from Indian businesses.
Present status:
Effective 1st April 2025, India removed the 6% levy on digital advertising under the OECD’s Pillar One framework.
The scope of equalization levy was expanded to include a 2% levy on revenue earned by non-resident e-commerce operators from Indian users. This included platforms facilitating online product sales, services, or delivering digital content. (ie covering broader digital services beyond advertising) without having any physical presence in India.
Eg: when an Indian user books a hotel on an international travel website or shops from an online fashion store hosted abroad.
This targeted platforms like booking.com, amazonUS, aliexpress those revenues from Indian users were taxed at 2%.
Present status:
Effective 1st August 2024, 2% levy on e-commerce was repealed under the OECD’s Pillar One framework.
Finance Act 2018, introduced the concept of SEP. The equalization levy of 2016 only taxed specific digital services like online advertising. That too it wasn’t governed by regular income tax rules, instead served as patchwork rule.
Concept of SEP Nexus expands the definition of business connection for non-resident entities, thereby establishing a nexus for taxation based on economic activity within India even without a physical presence. Instead of relying solely on physical presence (like a permanent establishment) to establish a taxable nexus, SEP considers factors like volume of transactions and user engagement within India.
Threshold Rules (as defined in Income tax rules are):
[a] If a non-resident company earns more than ₹2Crores from Indian customers through digital transactions (can be of any type, software downloads, streaming, SaaS etc), it may trigger SEP.
[b] Alternatively, if the company interacts with 3 lakh or more users in India digitally. (even without earning that 2 crore milestone) — SEP can still apply.
meeting either one of the threshold is sufficient to establish SEP.
Present status:
Though introduced in Finance Act 2018, SEP rule took effect from assessment year 2022-2023. With both equalization levies repealed, SEP is now the primary tool for taxing digital income from non-residents.
India isn’t a full member of the OECD, but participates in about 30 OECD committees including those on taxation, fiscal policy, and consumer protection.
In 2016, India joined the “Inclusive Framework on BEPS” which is a global network of countries working together to reform international tax rules and is led by the OECD and G20.
It this network that later in 2023, came up with draft Pillar One and Pillar Two solutions in its efforts towards ensuring fairer global taxation.
Pillar one, which is the relevant matter for our article, is one among the global initiatives to modernize international tax rules in response to the digitalization of the economy, that aims for fairer tax allocation that ensures the large multinational enterprises pay taxes in countries where they have significant consumer engagement, even if they don’t have a physical presence there.
At that time period of 2016, the Inclusive Framework network itself was newly formed and Pillar One was at conceptual stage.
But, with rapid growth of Digital economy, global digital giants were earning revenue from Indian market without paying taxes locally. Waiting for global consensus would’ve meant lost revenue and leverage. Hence India introduced equalization in June 2016, which itself was based on BEPS Action 1 options, which acknowledged that countries could adopt interim measures like equalization levies until a global solution emerged.
Around October 2021, Political agreement was reached among 135 countries wrt Pillar One and in October 2023 pillar one’s text was finalized. As of 2025, actual signing and implementation are still pending.
At this point, India’s decision to withdraw Equalization Levy in 2025 reflects its confidence that Pillar One will be operational soon.