Equalisation Levy and Significant Economic Presence: When a Foreign Company Owes Indian Tax Without Any India Entity

For nearly a decade, foreign companies selling into India had a strange kind of clarity: pay the Equalisation Levy — a flat 6% on digital advertising, or 2% on e-commerce revenue — and the matter was largely settled. No India tax return, no profit attribution exercise, no wading into whether you had a taxable presence. Just a clean, final, gross-revenue tax collected at source. That clarity is gone. India abolished the 2% e-commerce levy in August 2024 and the 6% advertising levy in April 2025, and with it went the income tax exemption that used to shield that same revenue from further scrutiny. What's left standing in its place is Significant Economic Presence — a considerably less forgiving framework that can make a foreign company taxable in India without an office, an employee, or any entity here at all.

This piece walks through what actually happened to the Equalisation Levy, how SEP works now that it's the primary mechanism left standing, and why the transition itself has created a genuine compliance trap for companies that assumed the old rules still applied.

What the Equalisation Levy Actually Did, and Why It Got Withdrawn

Introduced through the Finance Act 2016, the Equalisation Levy started narrow — a 6% tax on payments Indian businesses made to foreign companies for online advertising, informally nicknamed the "Google tax." It expanded in 2020 to cover a 2% levy on e-commerce supply of goods and services by non-resident operators. Its defining feature was simplicity: a flat percentage on gross receipts, collected without needing to determine the foreign company's actual profit, and — critically — income already taxed under EL was exempted from further income tax under Section 10(50) of the Income Tax Act, avoiding double taxation on the same revenue.

The withdrawal wasn't really a domestic policy reversal — it was largely a response to sustained pressure from the OECD/G20 Pillar One framework and specific trade friction with the United States, whose Trade Representative had repeatedly flagged unilateral digital taxes like India's EL as a sticking point in broader trade negotiations. India abolished the 2% e-commerce levy effective August 1, 2024, and the 6% advertising levy effective April 1, 2025, positioning the move as alignment with a coordinated global framework rather than India simply giving up its right to tax digital revenue.

The Trap Hiding in the Transition

Here's where this gets genuinely consequential for foreign companies that didn't revisit their India tax position after the EL disappeared. The Section 10(50) exemption sunsets from Assessment Year 2026-27 — meaning receipts that used to be cleanly settled by paying EL and claiming the exemption are now, post-transition, examined afresh under Section 9(1)(i) and the Significant Economic Presence provisions, or the applicable DTAA, as though the simpler EL regime never existed for that revenue stream.

A non-resident e-commerce operator who paid the 2% EL and moved on with its year is now facing genuine income tax exposure on the same India-sourced receipts, assessed on a net-income basis rather than the old flat-rate gross basis — often a meaningfully worse outcome, not a better one, despite the headline framing of "digital tax abolished" sounding like relief. Companies that treated the EL's withdrawal as good news without checking whether SEP now applies to them are the ones most likely to discover this gap during an assessment rather than through their own planning.

How Significant Economic Presence Actually Works

SEP was introduced in 2018 and became operationally live between 2021 and 2023, and with the new Income Tax Act, 2025 replacing the 1961 Act, it's now codified under Section 9(8)(d) — carrying forward the same core mechanics as its predecessor provision. A non-resident is deemed to have a Significant Economic Presence in India, and therefore a taxable "business connection," if either of two thresholds is crossed in a financial year:

The revenue threshold — aggregate payments arising from transactions in goods, services, or property with any person in India, including downloading of data or software, exceeding ₹2 crore in the previous year.

The user threshold — systematic and continuous soliciting of business activities or engaging in interaction with 3 lakh (300,000) or more users in India, regardless of whether any of those interactions generate direct revenue.

Notice what's absent from both tests: any requirement for physical presence, an office, an employee, or an agent in India. SEP was built specifically to capture exactly the kind of company that has no reason to think about how to open a company in India, because it has no local footprint by any conventional measure — it simply has enough Indian users or Indian-sourced revenue to trigger a deemed business connection anyway.

Why SEP Isn't Limited to Obvious Digital Businesses

SEP was designed with the digital economy in mind, but its language is broad enough that it doesn't confine itself neatly to SaaS platforms or e-commerce marketplaces. A foreign company licensing data, software, or digital content to Indian counterparties, or one running any kind of systematic, technology-enabled engagement with a large Indian user base, can find itself inside SEP's scope even if it doesn't think of itself primarily as a "digital" business. One meaningful clarification from the Finance Act 2025 worth knowing: export purchases are specifically excluded from SEP — a foreign company merely being purchased from by an Indian buyer for onward export doesn't, on its own, create SEP exposure for the foreign seller.

Why This Doesn't Operate in a Vacuum With GST

It's worth being clear that SEP and OIDAR GST registration are two entirely separate obligations, assessed on different bases, and a foreign digital company can genuinely owe both simultaneously. OIDAR GST applies to the supply of automated digital services to Indian recipients, charged at 18% regardless of profitability. SEP is an income tax question, assessed on a net-profit-attribution basis once the revenue or user threshold is crossed. A company that's already registered for OIDAR GST because it sells digital services to Indian consumers hasn't automatically addressed its separate SEP exposure — these are different tax bases, reviewed by different provisions, and clearing one doesn't clear the other.

Where DTAA Relief Still Provides a Meaningful Buffer

SEP's practical bite is genuinely constrained by India's tax treaty network. Because most of India's DTAAs still define taxability around traditional Permanent Establishment concepts rather than SEP's newer nexus test, a foreign company resident in a treaty country can often rely on the treaty's PE definition instead of India's broader domestic SEP rule, at least until treaties are specifically renegotiated to incorporate SEP-style provisions. This treaty override is a real, meaningful protection for many foreign companies — but it depends entirely on treaty residency and specific treaty language, which means it needs actual analysis against your specific home jurisdiction's DTAA with India, not an assumption that "we're covered because we're foreign."

When Setting Up an Actual India Entity Becomes the Cleaner Path

For a foreign company that's crossed SEP's thresholds and is now facing net-income assessment, profit attribution disputes, and treaty analysis every year just to determine its India tax position, the calculus around company formation in India often shifts. A properly structured Indian subsidiary — going through standard india online company registration, with a compliant resident director in place and clean FEMA-reported capital — replaces an annually contested, uncertain SEP assessment with a straightforward, predictable corporate tax filing on the subsidiary's own books. It doesn't eliminate Indian tax exposure, but it converts an ambiguous, potentially adversarial nexus determination into a known, manageable compliance obligation.

This is genuinely worth evaluating deliberately rather than defaulting either way — staying unincorporated and managing SEP exposure works fine for companies well under the thresholds, but for a business approaching or already past ₹2 crore in India-sourced revenue or 3 lakh Indian users, the administrative and dispute-risk cost of navigating SEP every year can outweigh the effort of proper foreign company incorporation services and a structured local entity.

Getting an Honest Read on Where You Actually Stand

The starting point for any foreign company selling into India digitally is a genuine assessment of where its revenue and user numbers actually sit against the ₹2 crore and 3 lakh user thresholds, and whether its home-country DTAA with India provides meaningful PE-based protection against SEP's domestic reach. Accorp Partners works with foreign companies through exactly this assessment — determining actual SEP exposure post-EL withdrawal, evaluating treaty relief, and where the numbers justify it, guiding the transition into how to register a company in India properly, so a business that's already effectively operating in the Indian market isn't left navigating an uncertain annual tax nexus question it could have resolved with a clean, incorporated structure instead.