Knowledge Nugget: Why is ‘Google tax’ important for the UPSC exam?

Key Takeaways:

1. An equilasation levy is colloquially called ‘Google tax.’ It is levied to ‘equalise’ the tax component of a resident e-commerce company as well as a non-resident e-commerce company. The equalisation levy of 6 per cent has been in force since 2016. This is applicable for e-commerce companies that are sourcing revenue from Indian customers without having a tangible presence in the country.

2. It is only applicable on payments exceeding Rs 1 lakh a year to a non-resident service provider for online advertisements. It is also not charged if such service is received for personal use and not for the purpose of any business or profession.​

3. In 2020, after amending the Financial Act, 2020, the government expanded the ambit of the equalisation levy for non-resident e-commerce operators involved in the supply of services, including online sale of goods and provision of services, with the levy at the rate of 2 per cent.

4. However, the United States has been critical of this tax and called it “discriminatory and unreasonable” arguing that domestic companies were exempt. That led to India repealing the 2 per cent EL in 2024. However, the 6 per cent levy had continued.

5. In addition to the equalisation levy, India also introduced the concept of Significant Economic Presence (SEP) for establishing “business connection” in the case of non-residents in India. The SEP applies to foreign businesses that have a strong digital or economic presence in India, but not physical. It applies in case of a transaction exceeding the specific limit.

Discussion on Financial Bill in the Parliament: Congress MP Shashi Tharoor; TMC’s Mahua Moitra (PTI)

Other changes introduced in the Financial Bill, 2025

1. The other amendments are made relating to assessment of undisclosed income found during searches and seizures. It has added a new term ‘Total Undisclosed Income’ to clarify that the target of search and seizure proceedings is to unearth and penalise the undisclosed income only.

2. The Bill has also defined the virtual digital space as “any digital realm that allows users to interact, communicate and perform activities” through computer technology. It includes email servers, social media accounts, online investment, trading and banking accounts, remote or cloud servers, and digital application platforms.

3. Virtual digital assets such as cryptocurrencies have been included in the definition of property to be counted as a capital asset of the assessee along with existing categories of immovable property.

4. The new Bill gives tax officers powers to override the access code of computer systems and virtual digital space, including online trading and investment accounts as well as cloud servers, in search and seizure cases.

BEYOND THE NUGGET: Base Erosion and Profit Shifting (BEPS)

According to the government, the equalisation levy and SEP align with India’s commitment to the Base Erosion and Profit Shifting (BEPS) Action Plan of the OECD.

1. According to the official website of OECD, Domestic tax base erosion and profit shifting (BEPS) relates to tax planning strategies of multinational enterprises that exploit the loopholes in tax rules to artificially shift profits to low or no-tax locations as a way to avoid paying tax.

2. The OECD/G20 BEPS Project equips governments with rules and instruments to address these issues of tax avoidance by ensuring that profits are taxed where economic activities generating them take place and where value is created.

3. BEPS Action 1 deals with the large challenges that arise from digitalisation of the economy to develop a consensus-based solution. The policy document of OECD mentions that “an ‘equalisation levy’ could be considered as an alternative way to address the broader direct tax challenges of the digital economy.”

4. Also, in October 2021, India, the United States, and fellow members of the OECD/G20 Inclusive Framework agreed to establish a two-pillar approach to tackle the tax complexities posed by the digital economy’s rapid growth.

5. The two-pillar solution of the global tax deal consists of two components — Pillar One, which is about reallocation of an additional share of profit to the market jurisdictions, and Pillar Two, consisting of minimum tax and subject to tax rules.

Post read question

With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct? (UPSC CSE 2018)

1. It is introduced as a part of the Income Tax Act.

2. Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the “Double Taxation Avoidance Agreements”.

Select the correct answer using the code given below :

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Subscribe to our UPSC newsletter. Stay updated with the latest UPSC articles by joining our Telegram channel – IndianExpress UPSC Hub, and follow us on Instagram and X.

🚨 Click Here to read the UPSC Essentials magazine for March 2025. Share your views and suggestions in the comment box or at manas.srivastava@indianexpress.com🚨