India has created a detailed digital tax system that focuses on taxing online activities. One major aspect of this system is a 6% equalization levy on online advertising services offered by foreign companies. This is combined with a 1% withholding tax on e-commerce transactions. A unique part of India’s approach is the Significant Economic Presence (SEP) rule. This rule says that companies can be taxed in India if they reach certain revenue levels (INR 20 million or about USD 240,000) or have a large number of users—specifically, 300,000 users. This shows India’s intention to collect tax from digital activities happening within the country. Recently, India also removed a 2% equalization levy on e-commerce operators, showing that it can adjust its tax policies based on feedback from businesses and changes in global tax practices.
However, this digital tax framework poses challenges for U.S. tech companies. Compliance can be complicated due to the mix of equalization levies, withholding taxes, and SEP rules. The user threshold of 300,000 puts pressure on many popular U.S. platforms that have extensive user engagement in India. Additionally, since taxes are based on gross revenue instead of profits, it can hurt the profitability of businesses in India, where costs tend to be lower and margins thin. Non-resident digital service providers must also register and pay Goods and Services Tax (GST), adding further complexity to their operations. This can lead to higher operational costs, which companies might have to absorb or pass on to Indian consumers.
Interestingly, China could gain an advantage from India’s digital tax policies. As China’s tech sector continues to grow globally, the revenue and user metrics set clear guidelines for Chinese companies looking to enter the Indian market. With state support and experience in dealing with complicated regulations, Chinese firms may be better equipped to handle compliance costs and taxes. They often work with local partners, which can help them structure their operations in ways that are more tax-efficient. This positioning might enable Chinese digital platforms to perform better in India compared to U.S. companies, which traditionally operate directly and must navigate the complete range of digital tax requirements.
