India’s ‘Google tax’ is dead – but will it stay dead?

India’s decision to abolish the “Google tax” marks a shift in digital tax policy – ​​influenced by both domestic feedback and, perhaps more importantly, international pressure.

The ‘equalisation levy’ was introduced in 2016 and was designed to ensure that digital multinationals not based in India paid their fair share of taxes on revenue generated from Indian users. The levy initially imposed a 6% tax on online advertising services and was later expanded to a 2% tax on e-commerce operators. It was widely viewed as ambiguous on compliance and administratively burdensome.

Go away

A recent announcement by Finance Minister Nirmala Sitharaman as part of India’s 2024-2025 budget states that the equalization cess will no longer be levied from August 1, 2024.

This policy fits into a broader global context, as many digital multinationals in the US vehemently opposed the levy. The US had previously responded with tariffs on India – as well as Austria, Italy, Spain, Turkey and the UK – but these were immediately suspended. The suspension was intended to buy time for negotiations and provide a clear incentive for states that impose taxes on digital services, such as India, to reconsider their position.

India’s move away from the “Google tax” is also in line with the Organisation for Economic Co-operation and Development’s (OECD) efforts to create uniform tax systems for multinational corporations. The OECD initiative aims to require companies to pay at least 15 percent of their turnover in taxes in every country in which they do business. This is intended to reduce the incentive to move projects to low-tax countries and to accommodate political motives such as those of India.

The abolition of the equalization levy is one building block in a larger program to modernize India. The 2024-2025 budget proposes several measures aimed at encouraging small businesses to adopt technology, driving digitization of government, and improving data collection and analysis capabilities to inform policy decisions.

As the Indian economy continues to modernise, the “Google tax” could be abolished, but it may not remain in place permanently.

Future return of the digital services tax

Despite India’s decision not to impose the tax equalisation levy for the time being, the global situation suggests that similar tax policies may continue in the future unless comprehensive international solutions such as the OECD Pillar 1 regime are implemented.

The OECD’s Pillar 1 initiative is designed to allocate taxing rights to countries in which multinational companies have a significant market and thus generate revenue. However, the ratification of the multilateral tax agreement required for Pillar 1 to come into force is encountering obstacles – including from the USA, which appears unwilling to sign the agreement.

Without a viable path to the adoption of Pillar 1, the global trend towards digital services taxes is likely to gain momentum. The opportunity for market jurisdictions to tax digital companies that generate significant profits within their borders is simply too attractive.

looking ahead

As digital economies continue to grow and evolve, the need for a fair and efficient tax framework becomes increasingly important. Without a unified approach, the proliferation of one-off taxes on digital services such as India’s equalization levy seems inevitable. Therefore, the future of efficient international tax policy will depend heavily on the success or failure of initiatives such as the OECD’s Pillar 1 – and consequently heavily on the willingness of the United States to join in.