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Cross-border Digital Services: Equalisation Levy vs GST vs Income Tax
1. 🇮🇳 Equalisation Levy: A Digital Tax
What is It?
- A withholding tax on payments to non-resident digital service providers without Indian presence (trustiics.com).
- 6% on online advertising (originally), 2% on e-commerce operator transactions (from 2020) (practiceguides.chambers.com).
Recent Changes:
- 2% levy abolished Aug 1, 2024
- 6% levy abolished April 1, 2025 under the 2025 Finance Act (practiceguides.chambers.com, vatcalc.com).
- Despite removal, Significant Economic Presence (SEP) rules and international tax nexus are evolving (practiceguides.chambers.com).
Applicability & Compliance:
- Applies when payments exceed ₹2 crore/year, and no permanent establishment (PE) exists in India (tradecommissioner.gc.ca).
- Collected quarterly; annual return filed via Form 1 (trustiics.com).
2. 🧾 GST on Cross-border Digital Services
What is GST?
- A destination-based consumption tax on supply of digital services (OIDAR) to Indian consumers (B2C) (trustiics.com).
- Foreign B2B buyers under reverse charge must self-assess and pay GST .
Registration & Compliance:
- Mandatory registration—no threshold exemption—for foreign suppliers of OIDAR .
- File monthly returns (GSTR‑5A/B), issue invoices, and remit tax seriously (akmglobal.com).
3. 📊 Income Tax Implications (PE and SEP)
Permanent Establishment (PE) & Significant Economic Presence (SEP)
- Presence via Indian office or agents → PE → subject to income tax on profits from India (trustiics.com).
- SEP criteria may deem non-residents taxable if turnover > ₹20 million or ≥300,000 Indian users .
Royalty & Fee-for-Service Taxation
- Payment to non-residents for royalties or technical services (e.g. software licensing) may attract 20% withholding (practiceguides.chambers.com).
4. 🔄 Comparing the Three Mechanisms
| Aspect | Equalisation Levy | GST | Income Tax / PE/SEP |
|---|---|---|---|
| Tax Type | Withholding tax | Indirect consumption tax | Direct tax on profit |
| Applies To | Non-resident digital operators | OIDAR B2C / B2B under reverse charge | Non-residents with Indian PE/SEP |
| Rate | 6% (ads) / formerly 2% (e-com) | 18% (standard), others as applicable | Up to 25–40% + surcharge/cess |
| Compliance By | Payer in India | Foreign supplier (B2C) or Indian recipient (B2B) | Non-resident company |
| Overlap Risk | High before levy removal | Moderate – distinct from EL | Varies based on presence & SEP rules |
5. ✅ Best Practices for Compliance
- Assess your structure: Are you a B2C OIDAR service? Marketplace? Advertiser?
- Track turnover to determine equalisation levy and SEP applicability.
- Register for GST if OIDAR B2C; File GSTR‑5A / GSTR‑5 timely.
- Monitor PE/SEP thresholds → apply DTAA benefits.
- Reclassify payments (e.g., royalty vs service fees) correctly under tax treaties.
- Adjust contracts and invoices: Choose where compliance burden lies.
- Stay updated on SEP & EL changes under Finance Act 2025.
🔔 Key Updates in 2025
- Equalisation Levy now abolished entirely—policy shift aligned with OECD Pillar One (india-briefing.com, reuters.com, trustiics.com, practiceguides.chambers.com, tradecommissioner.gc.ca, akmglobal.com).
- SEP rules (₹20M turnover / 300k users) may still create income-tax liability after April 2025 .
- GST continues to apply—no threshold relief for foreign suppliers (trustiics.com).
📌 Conclusion
Post-2025, foreign digital providers need a multi-layered tax compliance strategy:
- Equalisation Levy: now historic
- GST: applies to digital services—register and file
- Income Tax: monitor SEP and PE risk
This balanced approach will help prevent double taxation, ensure regulatory compliance, and maintain smooth operations in India.
💼 Need Help with Cross-border Tax Strategy?
Verotus Finlegal Solutions LLP offers expert advice on GST, Equalisation Levy, Income Tax, and DTAA risk assessment for foreign digital service providers.
📍 Kolhapur, Maharashtra
🌐 www.verotusllp.com
📞 +91‑7066336680
