India’s ‘Google Tax’ Is Dead—But Will It Stay Dead?

India’s decision to abandon its “Google Tax” marks a shift in digital taxation policy—influenced by both domestic feedback and, perhaps more importantly, international pressures.

The “equalization levy” was introduced in 2016 and aimed to ensure digital multinational corporations, not based in India, paid their fair share of taxes on revenues generated from Indian users. The levy initially imposed a 6% tax on online advertising services and later expanded to a 2% tax on e-commerce operators and was widely regarded as ambiguous from a compliance standpoint and burdensome administratively.

Stepping Away

The recent announcement by Finance Minister Nirmala Sitharaman, as part of India’s 2024-2025 budget, confirmed the equalization levy will no longer be applied, beginning August 1, 2024.

There is a broader global context into which this policy fit, as many digital multinationals in the United States strongly opposed the levy. The U.S. previously retaliated with a tariff on India—along with Austria, Italy, Spain, Turkey and the United Kingdom—which was immediately suspended. The suspension was to allow for time for negotiations, providing a clear incentive for states applying digital services taxes like India’s to reconsider their position.

India’s step away from the “Google Tax” is also in keeping with efforts at the Organization for Economic Co-operation and Development to promote uniformity in taxation frameworks for multinational corporations. The OECD initiative aims to require companies pay at least 15% of their revenue as tax in each nation where they do business—in an effort to reduce the incentive to off-shore projects to low-tax jurisdictions and satisfy policy motives like that of India.

The elimination of the equalization levy is one plank in a larger platform of modernization efforts in India. The 2024-2025 budget outlines various policies aimed at encouraging small businesses to adopt technology, furthering government digitalization, and enhancing data collection and analysis capabilities to inform policy.

As the Indian economy modernizes further, the “Google Tax” may be dead—but it may not stay dead.

Future Return of Digital Service Taxes

Notwithstanding India’s decision to abandon its equalization levy for now, the global landscape suggests that similar tax policies may continue to proliferate unless comprehensive international solutions like OECD’s pillar 1 framework are implemented.

The OECD’s pillar 1 initiative is designed to allocate taxing rights to countries where multinational enterprises have a significant market and thus generate revenues. The ratification of the multilateral tax convention required to see pillar 1 come into force, however, faces hurdles—including from the US, which appears unwilling to be a signatory.

Without a viable path to passage of pillar 1, the global trend towards digital service taxes will likely gain momentum. The ability for market jurisdictions to tax digital corporations that generate substantial profits within their borders is simply too attractive.

Looking Ahead

As digital economies continue to expand and evolve, the need for an equitable and efficient tax framework becomes critical. Absent a unified approach, the proliferation of one-off digital service taxes like the equalization levy in India seems inevitable. As such, the future of efficient international tax policy will depend heavily on the success or failure of initiatives like OECD’s pillar 1—and, consequently, will depend heavily on the willingness of the U.S. to get on board.