Why India-US digital services deal potentially intrudes into New Delhi’s sovereign policy space

This assumes significance as India had already removed the ‘Google tax’ before the US trade negotiations formally began. But Washington, during the negotiations, sought a unilateral commitment from India not to reintroduce the tax in the future under the trade deal, as reported earlier by this newspaper.

On July 8 last year, The Indian Express had reported that legal advisers to the Ministry of Commerce and Industry had suggested that Indian negotiators dealing with their US counterparts should not accept Washington’s proposal that prohibits India from reintroducing equalisation levy-style taxes, popularly known as the Google tax.

As part of the 35th amendments to the Finance Bill, 2025, the Centre proposed removing the 6% equalisation levy (EL) it used to charge on digital ads. Effective April 1, 2025, the levy was abolished on online advertisements provided by non-resident digital companies, which followed the earlier removal of the 2% equalisation levy on e-commerce services through the Finance Act, 2024. The equalisation levy was introduced by the Finance Act, 2016, on online advertisements and later expanded to cover digital services as a measure to ‘equalise’ the tax treatment of resident and non-resident e-commerce companies.

The legal advisers had told the Ministry that the provisions proposed by the US were “unilaterally framed” as it did not state that both parties should refrain from applying digital taxes on each other; instead, they sought a legal commitment only from the Indian side.

While the US offers a range of digital services in India and American tech companies have long lobbied against any taxes on such services, India also exports a wide range of digital services to the US — particularly in the IT sector — generating the majority share of its total services export earnings from the US market.

Another concern raised with the government was that agreeing to such unilateral provisions could set a risky precedent for future trade negotiations, where similar demands could be made by other trading partners during talks with New Delhi, thereby complicating future negotiations.

A query emailed to the Ministry of Commerce and Industry remained unanswered till press time.

Trade experts said that digital taxation is typically discussed outside the framework of a trade agreement, as it is a nation’s sovereign right to decide on such matters, and India should reserve that right.

Notably, the US has forced Indonesia to several steep terms on digital trade. Indonesia has committed to addressing barriers impacting digital trade, services, and investment, a White House statement from July last year stated.

“Indonesia will provide certainty regarding the ability to transfer personal data out of its territory to the United States. Indonesia has committed to eliminate existing HTS tariff lines on “intangible products” and suspend related requirements on import declarations; to support a permanent moratorium on customs duties on electronic transmissions at the WTO immediately and without conditions; and to take effective actions to implement the Joint Initiative on Services Domestic Regulation, including submitting its revised Specific Commitments for certification by the World Trade Organization (WTO),” the White House statement from July last year read.

The United States Trade Representative (USTR), in its report on non-tariff barriers, had earlier cited the 6% equalisation levy as a discriminatory measure against US firms. The USTR report said that most digital services taxes are designed in ways that discriminate against US companies, often singling out American firms for taxation while excluding domestic companies engaged in similar lines of business.

The US has also raised concerns about digital services taxes with a number of trade partners, particularly the EU. The US had also threatened to impose additional 10% tariffs over a dispute on the digital services tax.

“The disproportionate capture of US firms by the EU’s Digital Services Act (DSA) and Digital Markets Act (DMA) is also noted as undermining US competitiveness due to increased compliance costs not borne by EU competitors,” the USTR said.