India's Equalisation Levy — does your foreign SaaS or IT services company owe it?

If you are a foreign SaaS company, cloud services provider, or digital IT services firm that has been worrying about India's Equalisation Levy — the short answer is: it no longer applies.

India has fully abolished its Equalisation Levy regime in two stages:

• The 2% levy on e-commerce and digital services (including SaaS, cloud, online education, and platform services) was abolished on 1 August 2024 via the Finance Act, 2024

• The 6% levy on online advertising (the original "Google Tax") was abolished on 1 April 2025 via the Finance Act, 2025

As of May 2026, India has no standalone digital services tax. Foreign SaaS and IT companies earning revenue from Indian customers are no longer subject to the Equalisation Levy on any transactions.

However, the story does not end there. Understanding what the levy was, what happened to pending liabilities from pre-abolition periods, and what tax obligations now apply to foreign digital companies in India is essential — particularly for any company that received Indian revenue between 2020 and 2024 without filing correctly.

What Was the Equalisation Levy?

India introduced the Equalisation Levy (EL) through Chapter VIII of the Finance Act, 2016 — as a standalone direct tax sitting outside the Income Tax Act — to tax digital transactions involving non-resident companies earning revenue from Indian businesses and users without maintaining a physical presence in India.

EL 1.0 — 6% on Online Advertising (2016–2025)

The original Equalisation Levy imposed a 6% charge on payments made by Indian residents (businesses) to non-resident digital companies for online advertising services. The levy was deducted by the Indian payer — an Indian advertiser paying Google, Meta, or any foreign ad platform would deduct 6% EL and deposit it with the Indian government.

This is why it was nicknamed the "Google Tax" — it directly targeted the revenue Google, Facebook, and other foreign ad platforms earned from India without a taxable presence.

EL 2.0 — 2% on E-Commerce and Digital Services (2020–2024)

In April 2020, the Finance Act, 2020, dramatically expanded the Equalisation Levy to cover e-commerce operators — non-resident companies facilitating or supplying:

• Goods online to Indian buyers

• Services online to Indian users

• Software-as-a-Service (SaaS)

• Cloud computing services

• Digital content and streaming

• Online education platforms

• Digital advertising services (beyond the 6% EL)

• Data and information services

The 2% EL 2.0 was charged on the aggregate consideration received by the non-resident e-commerce operator from Indian customers — applied to the gross revenue, not the profit. No minimum threshold. No treaty relief. No deduction.

This is the EL that affected foreign SaaS companies selling subscriptions to Indian customers, cloud providers charging Indian businesses, and digital platforms with Indian revenue.

EL 2.0 was abolished on 1 August 2024. Transactions on or after that date are no longer subject to the 2% levy.

Why Was the Equalisation Levy Abolished?

Two forces drove the abolition:

1. International pressure — primarily from the US The US Trade Representative (USTR) repeatedly cited India's Equalisation Levy as a discriminatory digital trade barrier targeting American tech companies. With the Trump administration threatening reciprocal tariffs on Indian goods from April 2025, India removed the 6% EL on 1 April 2025 as part of a broader diplomatic de-escalation on trade.

2. OECD Pillar One alignment The OECD's Pillar One framework — a global agreement to allocate taxing rights on large digital companies based on where users are located — was designed as the multilateral replacement for unilateral digital services taxes like India's EL. India's commitment to Pillar One made the standalone EL redundant in principle, even if the Pillar One implementation timeline has repeatedly slipped.

What About Pending EL Liabilities from 2020–2024?

Transactions that occurred between April 2020 (EL 2.0 introduction) and 31 July 2024 remain subject to the 2% EL. Pending assessments, appeals, refund claims, and compliance obligations for pre-abolition periods continue under the original regime.

This matters significantly for foreign SaaS and digital companies that:

• Received Indian revenue between FY 2020-21 and FY 2024-25 (part year)

• Did not file annual EL statements or pay the levy

• Are now receiving or expect to receive assessment notices from the Indian tax authorities for prior periods

The Equalisation Levy annual statement (Form 1) was due on 30 June each year for the preceding financial year. Foreign companies that missed filings for FY 2020-21 through FY 2023-24 face potential assessments, penalties under Section 10 of the Finance Act 2016, and interest for late payment.

If your company received Indian revenue from SaaS subscriptions, cloud services, or digital platform fees during any period from April 2020 to July 2024 and did not file EL statements, consult a qualified CPA or CA immediately. The abolition of the levy going forward does not eliminate past liability.

What Taxes Apply to Foreign Digital Companies in India Now?

With the Equalisation Levy gone, how is India taxing foreign digital companies earning revenue from Indian customers?

Significant Economic Presence (SEP) — Section 9 of the Income Tax Act

India introduced the Significant Economic Presence (SEP) concept in Section 9(1)(i) of the Income Tax Act — a domestic law mechanism that attributes Indian-source income to a non-resident based on digital or economic activity thresholds, even without a physical office in India.

Under SEP rules, a non-resident is deemed to have a business connection in India (and therefore taxable Indian income) if:

• Revenue threshold: Aggregate payments from Indian transactions exceed ₹2 crore (approximately $240,000) in a financial year, OR

• User threshold: Systematic engagement with 300,000 or more users in India in a financial year

If a foreign SaaS company crosses either threshold, its India-sourced profits are potentially taxable in India under the Income Tax Act — subject to the India-source income computation rules and, crucially, the applicable Double Tax Avoidance Agreement (DTAA).

India-US DTAA and PE Analysis

For US-based companies, the India-US Double Tax Avoidance Agreement provides treaty protection. A US company is generally not taxable in India on business profits unless it has a Permanent Establishment (PE) in India — a fixed place of business, a dependent agent, or a construction/service PE.

Most foreign SaaS companies selling subscriptions digitally to Indian customers, with no Indian employees or servers, likely do not have a PE under treaty analysis. However:

• If you have Indian developers or salespeople working exclusively for you (directly or through contractors), you may have a service PE or dependent agent PE

• If you use Indian cloud infrastructure in a specific, dedicated way, there are arguments around fixed place PE

• The SEP provisions are domestic law — they are not automatically overridden by the DTAA in all cases, and this area of law is actively evolving

The practical position for most small and mid-size foreign SaaS companies with Indian revenue below ₹2 crore and fewer than 300,000 Indian users: no current Indian tax obligation, provided no PE exists. For companies above these thresholds, a PE and SEP analysis is strongly recommended.

Withholding Tax (TDS) on Software and IT Service Payments

A parallel and frequently overlooked obligation: Indian businesses paying a foreign company for software, SaaS, or IT services are required to deduct TDS under Section 195 of the Income Tax Act.

• TDS rate for royalties and software fees paid to foreign companies: 10–25%, depending on treaty and classification

• The Indian payer (your Indian customer) deducts TDS and deposits it with the Indian government

• The foreign company receives net proceeds and can claim a foreign tax credit in its home country

If your Indian customers are deducting TDS on your invoices — and many will be, particularly large corporates and IT companies — you should be collecting the Form 15CA/15CB documentation and ensuring the deducted tax is reflected in your home-country tax return.

Should a Foreign SaaS Company Now Incorporate in India?

The abolition of the Equalisation Levy — and the shift to a PE and SEP framework — changes the calculus for whether a foreign SaaS or IT services company should formally incorporate in India.

Arguments for India incorporation now:

• Convert PE risk into a managed structure. If your Indian customer relationships, salespeople, or support staff create PE risk, having an Indian entity converts uncontrolled exposure into a compliant, optimised structure.

• Access to direct customer relationships. An Indian entity can contract directly with Indian enterprise customers who require local vendor contracts, GST invoices, and Indian bank payment rails.

• Talent and R&D. Setting up an Indian private limited company registration in India lets you hire developers directly, access Indian R&D incentives, and build a structured India team.

• India's growing SaaS market. India is the world's second-largest SaaS market by growth rate. A local entity with a proper company formation in India structure positions you for long-term India revenue that a pure cross-border model cannot fully capture.

Arguments against immediate incorporation:

• If your Indian revenue is modest (below ₹2 crore), users are below SEP thresholds, and you have no Indian employees, the compliance cost of an Indian entity may not be justified yet.

• The private limited company registration cost in India — including ongoing statutory compliance — runs $5,000–$15,000 in the first year. For early-stage companies testing the Indian market, the EOR model or a structured contractor arrangement may be more appropriate.

How Accorp Partners Helps Foreign SaaS and IT Companies With India Tax

Accorp Partners provides company incorporation services India and cross-border tax advisory for foreign SaaS, IT services, and digital companies navigating India's post-EL tax environment.

Our services include:

• EL back-filing and compliance — assessment of prior-period EL liability (FY 2020-21 to 2024-25), Form 1 filing, penalty minimisation

• SEP and PE analysis — determining whether your Indian revenue and user base creates Indian tax exposure under the Income Tax Act and India-US/UK/Singapore DTAA

• TDS advisory — guidance on Section 195 TDS deductions by Indian customers and foreign tax credit claims

• India incorporation advisory — whether and when to set up an Indian entity, structured as a wholly-owned pvt ltd company registration in India or as a branch office

• End-to-end India company registration — SPICe+, online company registration process, PAN, TAN, GST, resident director arrangement for foreign founders, private limited

• Transfer pricing — documentation for intercompany transactions between the foreign parent and Indian subsidiary

• FEMA compliance — FC-GPR filing, FLA returns for Indian entities with foreign shareholders

Whether you are assessing past EL exposure or planning your first India incorporation as a foreign digital company, we provide the dual-jurisdiction expertise to navigate both the Indian and home-country sides of the compliance.

Looking to register a company in India? Visit our India Incorporation Services page for expert guidance.