Google Tax Explained: Understanding Equalisation Levy on Digital Transactions as Google Turns 27

Google turns 27. The search giant that began as a modest research project in 1998 by Sergey Brin and Larry Page has grown from a text-indexing engine called “BackRub” run on rudimentary computers and early campus networks, to a mammoth global platform that has cut in-roads so intrinsic into our lives that it is now the first point of query for anything and everything.

The operation, launched by the founders during their time at Stanford University initially ran on simple server racks and university networks, laboring over crawled pages and manual page-ranking experiments. This grounded search logistics story led the way for the multiple avenues that Google later expanded to. One of the most significant avenues is indeed Google’s ad business which sits at the core revenue engine, monetising search and digital platforms by selling targeted ad spaces.

What is Google Tax?

The ‘Google Tax’ or more formally known as the ‘Equalisation Levy’ is India’s targeted tax on certain cross-border digital revenues earned by non-resident companies from Indian users and businesses.

The equalization levy was informally named “Google Tax” because Google Ads and similar platforms were the obvious targets of the levy. The equalization levy sought to tax value created in the Indian market by firms that lacked a traditional physical presence within the jurisdiction of India.

The levy extended to multiple avenues and covered online advertising, specified digital services and later certain e-commerce receipts even. The core intent behind the levy was to capture any tax on market-based profits that would otherwise avoid the domestic tax net.

Origin of the Equalisation Levy in India

The Equalisation Levy was introduced in India in 2016 through the Finance Act, 2016 to address the taxation challenges posed by the fast-growing digital economy following the advent of smartphones and increased internet activity from all quarters.

Legislators presented the levy as a measure to restore parity between domestic suppliers who were taxable and foreign digital suppliers who could earn substantial revenue from India without maintaining a permanent establishment in the country and not being subject to local taxation laws.

Traditional tax rules, which were formulated on the basis of the physical presence of companies had no provisions to capture this new stream of cross-border income, prompting the government to design a specific levy aimed to close this gap.

The levy initially applied a 6 percent tax on payments made by Indian businesses to non-resident companies for online advertising and related services, provided the annual payments exceeded ₹1 lakh.

Responsibility for deducting and depositing the levy rested with the Indian payer, ensuring that compliance remained under domestic control. In essence, the levy created a level playing field between Indian digital service providers who were already taxed, and foreign players who otherwise operated without direct tax obligations.

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Expansion to E-Commerce Transactions

The Equalisation Levy was introduced in 2016 with a narrow scope, focusing only on online advertising services provided by non-resident companies. However, the explosive growth of digital commerce soon prompted the expansion of relevant legislative frameworks.

In 2020, the government widened the levy to cover e-commerce operators under the umbrella of equalisation levy, introducing a 2 percent tax on revenues earned by foreign platforms from Indian users.

The year 2020 saw a paradigm shift in the social and commercial spending behavior of the masses, brought about by the COVID-19 pandemic. The e-commerce and Over-The-Top (OTT) platform boom moved beyond advertising into the broader ecosystem of online marketplaces, streaming services and platforms facilitating digital sales.

For the first time, foreign companies directly earning from Indian consumers were brought within the tax net, irrespective of whether they had any physical presence in India.

For advertising services, the onus to pay the levy was on the Indian payer, who had to deduct 6 percent before remitting payment abroad. In contrast, the 2 percent levy on e-commerce transactions was collected directly from the revenue generated by the foreign operators.

The dual structure allowed India to exercise control over the entities either through its domestic businesses making payments or by mandating compliance from the non-resident platforms themselves.

Failure to comply with the norms meant penalties and interest charges.

The Global Tech-Wreck

The effects of the equalisation levy rippled across the digital economy, shaping business models, ad costs and even trade diplomacy.

For foreign tech giants like Google, Facebook, Amazon and other non-resident platforms, the levy increased the effective cost of doing business in India. Faced with this additional burden, many companies chose not to undertake the expense themselves but instead passed on the onus to advertisers.

As a result, the going rates for deploying digital ad rates in India rose, levying a huge toll on startups, small and medium enterprises and independent advertisers who relied heavily on online promotion for brand-visibility. For companies operating on shoestring marketing budgets, the 6 percent charge on advertising transactions meant restructuring ad campaigns, reducing spend or diverting resources elsewhere.

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The 2 percent levy imposed in 2020 on e-commerce transactions had similar implications. As a result, global platforms selling to Indian consumers saw their operating margins squeezed owing to the loss of interested advertisers.

The domino effect triggered by the regulation led to part of the cost being shifted onto consumers and sellers, thereby raising the overall cost of participating in the Indian digital economy. What began as a measure to ensure fair taxation quickly turned into a factor influencing pricing structures, marketing strategies, and business decisions for both foreign firms and their Indian partners.

Equalisation Levy in Other Countries

Globally, India was not alone in seeking to tax the profits of digital companies that operated across borders with minimal physical presence within borders. The United Kingdom introduced its “Diverted Profits Tax” in 2015, and countries like France, Italy and Spain followed suit, implementing their own digital services taxes.

Collectively, these measures reflected frustration with the loopholes that allowed multinational corporations to shift profits to low-tax jurisdictions with Google becoming the poster child for such practices. However, the search giant wasn’t alone in the arena, with Meta, Apple, Amazon and even non-tech multinationals like Starbucks and Diageo accused of reducing their tax bills through aggressive structuring.

India’s unilateral levy of such scale not only raised compliance issues for multinational firms but also attracted strong reactions from the United States, which argued that the measure discriminated against American companies. The office of the US Trade Representative investigated the levy under Section 301 of the US Trade Act and concluded that it was “unreasonable and discriminatory”. The finding intensified trade tensions among both countries, with the US threatening reciprocal tariffs and using the issue as leverage in bilateral negotiations.

Was it the Perfect Solution?

Though the legislation sought to correct issues in taxation and collection, the Equalisation Levy was far from an imperfect solution. Revenue collections were modest reported collections just under ₹4,000 crore, with Bengaluru accounting for a large share. Considering the revenue influx and the vulnerability of the levy due to its unilateral nature led to diplomatic pushback.

While it did highlight the inadequacy of existing international tax frameworks, it also added compliance burdens on companies and inflated costs for Indian advertisers. In effect, the measure exposed the difficulty of balancing three competing goals: protecting domestic tax revenues, ensuring fair competition and maintaining smooth global trade relations.

The “tech-wreck” was not simply about numbers; it was about trust, trade, and the structure of the global economy. On one side were national governments eager to claim their share of digital profits; on the other were multinational companies resistant to piecemeal taxation across jurisdictions. Sanchiwiched between them were businesses and consumers who ultimately bore the cost of these levies.

Scrapping the Google Tax in India

India removed the 2 percent e-commerce levy in August 2024 and announced the abolition of the 6 percent equalisation levy on online advertisements effective April 1, 2025 as part of the amendments brought about by the Finance Bill in 2025. Officially, the changes were attributed to enforcing alignment with evolving international norms and the need to ease trade tensions that had arisen due to the levy.

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Relief for Advertisers and Trade Relations with US

The effects of scrapping the levy was imminent - both, foreign digital providers and Indian advertisers faced lower compliance burdens and had a more conducive playground in terms of price-margin dynamics.

The removal also served strategic trade objectives, easing the tensions owing to unilateral decision-making from India. The rollback of the levy - which had previously attracted criticism from US trade authorities was touted as a pragmatic step to reduce bilateral trade tensions and aided ongoing negotiations on reciprocal tariffs and broader trade concerns.

Conclusion

As Google steps into its 27th year of existence, one may sit and ponder the various realms, industries and legislation that Google has influenced. The Silicon-Valley pioneer’s rise has reshaped markets, regulation and tax policy.

Its journey from a dorm-room project to a global powerhouse underscores how technology not only transforms daily life but also forces governments to rethink economic and legal frameworks, market players to restrategise and consumers to reallocate their money accordingly and needs accordingly, and if any of them are not sure about something, they can always just Google it!

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