India to scrap 'Google Tax' from April 1, 2025: What it means? READ

India is expected to abolish the 6% equalisation levy, commonly referred to as the "Google tax," on online advertising services by foreign technology firms such as Google and Meta. The tax will be eliminated from April 1, 2025, through amendments to the Finance Bill, news agency. This action follows attempts to enhance trade relations with the US, which had earlier condemned the tax and threatened retaliatory tariffs. The abolition of the tax is likely to benefit tech firms, advertisers, and India's digital economy.

What is the GOOGLE tax?

The Equalisation Levy was put in place in 2016 to tax funds paid by Indian companies to other foreign companies for digital advertising purposes. It sought to ensure that international technology giants, which obtain a lot of revenue from Indians but lack any physical presence there, contribute towards India's taxes. Originally fixed at 6% on online advertisement services, the levy was subsequently extended in 2020 to also cover a 2% tax on all e-commerce businesses with annual business above Rs 2 crore in India. The 2% levy was withdrawn last year after a deal between India and the US. Now, the government intends to withdraw the initial 6% tax as well.

Why is the governement removing it?

The removal of the tax is a part of India's negotiations with the US to prevent trade wars. The US had earlier threatened to apply tariffs of as much as 25% on Indian goods like shrimp, basmati rice, and jewelry in retaliation against the equalisation levy. Experts are of the view that the removal of the tax will better the India-US relationship and avert any future trade war. Some nations, such as the UK, are also planning to withdraw their own similar digital taxes to avert tensions with the US. "Removal of equalisation levy is a prudent step taken by the government, as the collections were not that high and it was on the cards of the US administration," said Sudhir Kapadia, EY senior advisor.

How will tech giants gain?

The abolition of the Google tax is likely to deliver several benefits to foreign tech companies doing business in India:

• Reduced advertising Expenses – Without the 6% tax, advertising on platforms such as Google and Meta will cost less for Indian firms, leading to increased digital ad expenditure.
• Increased profit margins – Tech giants no longer need to factor in the levy as part of their pricing, enhancing their profitability.
• More Advertisers on Digital Platforms – Reduced costs could bring in more advertisers, increasing revenues for digital platforms.
• Improved Trade Relations – India's action might stop the US from forcing retaliatory tariffs, which would keep the trade environment stable for multinational companies.

Impact on India's digital economy 

The move to scrap the tax is likely to induce greater foreign investment in India's digital economy. By reducing advertising costs, it may also trigger greater expenditure online, which could be good for companies that bank on digital marketing.Further, the government has suggested abolishing some of the tax exemptions enjoyed by foreign technology firms in lieu of the equalisation levy. This implies that although the levy will be abolished, firms can still be taxed under other sections.

Changes to offshore funds rule

In addition to junking the equalisation levy, the Finance Bill also calls for amendments in rules related to offshore fund management. One of the major amendments deletes the term "indirectly" from a provision that curbed Indian residents from investing in offshore funds. This is meant to simplify it for offshore funds to shift bases to India. Anil Talreja, a partner at Deloitte India, said, "The proposed amendments are intended to clarify tax legislation and resolve issues being encountered by business."