If your company serves Indian customers or offers digital services to India—whether you are based overseas or operating across borders—you may owe equalisation levy, digital services tax, or both. These are not straightforward income taxes. They sit between VAT-like concepts and profit taxes, apply at different rates to different service types, and carry real compliance and cash-flow consequences if missed.

The Indian tax authority treats digital and online service transactions with particular scrutiny. The rules are layered, the thresholds matter, and the safe harbour is narrower than many assume. This guide walks you through what applies, who pays, what the rates are, and what your company should verify this week.

What Is Equalisation Levy and Who Must Pay It

Equalisation levy is an indirect tax on specified digital services supplied to non-residents or to Indian residents by non-resident service providers. It was introduced to level the playing field: traditional businesses in India collect GST; many digital and online service providers did not. Equalisation levy bridges that gap.

The 6% Rate (Original Scope)

A 6% equalisation levy applies to online advertising services. This covers display advertising, banner ads, search-linked ads, and sponsored content served to Indian users by a non-resident entity. If your business places ads on behalf of international brands or operates a digital advertising platform serving India, this rate likely applies to your gross consideration (revenue, not profit).

The 2% Rate (Expanded Scope)

A 2% equalisation levy applies to a much broader class: any specified digital service supplied by a non-resident to an Indian resident, except for services expressly carved out. “Specified digital service” includes online marketplaces, online supply of goods, cloud-based software-as-a-service, streaming services, online gaming, payment wallets, and online intermediary services.

This is the rule that catches most cross-border businesses. If you operate a SaaS platform, an online marketplace, a digital platform, or any internet-enabled service serving Indian customers, the 2% rate likely applies unless you fall into an exemption.

Exemptions and Safe Harbours

The Turnover Threshold

If your aggregate annual turnover from digital services supplied to Indian residents (in the financial year) does not exceed a defined threshold—currently 2 crore rupees as the rules currently stand—you may be exempt from equalisation levy. However, this exemption is not automatic. You must claim it, document it, and be ready to prove it. The threshold applies globally across all your digital service revenue into India, not per service or per subsidiary.

Intra-Group Transactions

Services supplied between related entities (sister companies, parent-subsidiary, branches) are exempt from the 2% levy under certain conditions. The exemption does not apply to the 6% advertising rate. If your multinational group supplies shared IT, software, or processing services to your Indian subsidiary at cost or at an arm’s length price, the levy may not apply—but the exception is conditional, requires documentation, and the definition of “related entity” is strict.

Notified Services

The Ministry of Finance maintains a list of notified services that are exempt from the 2% levy. This includes certain financial services, insurance, and a narrow set of other categories. The list is not long and is updated infrequently, so do not assume your service is exempt without verification.

Digital Services Tax: The Recent Layer

In addition to equalisation levy, India has introduced a 6% Digital Services Tax (DST) under the new Income Tax Act, effective from 1 April 2026. This is a separate obligation that overlaps with—but does not replace—equalisation levy.

DST applies to non-residents supplying digital services to Indian residents or Indian businesses. The scope is similar to the 2% equalisation levy (online advertising, SaaS, e-commerce, payment services, etc.) but is computed on net consideration after certain deductions. In practice, you may owe both levy and DST on the same revenue, though the rules permit some credit mechanism under the new Act.

Our comparison of the new Income Tax Act and the old framework details how DST interacts with prior tax obligations. The DST is imposed at the point of supply and must be accounted for separately from income tax.

Practical Compliance: What You Must Do Now

Audit Your Service Classification

The first step is to classify each service or product line you supply to Indian customers. Is it advertising? SaaS? An online marketplace? A payment service? Each classification triggers a different tax rate and potentially different exemptions. Do not rely on your internal categorisation alone; cross-check against the statutory definition in the rules and the official notifications.

Calculate Aggregate Turnover

If you believe you qualify for the 2-crore threshold exemption, calculate your total annual turnover from all digital services to Indian residents in the relevant financial year. Include revenue in Indian rupees and convert foreign currency at the RBI rate for the date of supply. Document this calculation because the burden of proof is on you if the tax authority questions it.

Check Related-Entity Status

If your company is part of a group and some services are supplied by related entities, verify whether those entities meet the definition of “related” under the rules and whether your arrangement qualifies for exemption. The exemption is narrow and conditional on arm’s length pricing, proper documentation, and timely disclosure.

Register and File Returns

Both equalisation levy and DST require registration and periodic filing with the Indian tax authority. Registration is typically done via the online tax portal. You will need to file quarterly or annual returns (depending on your turnover and the levy type) showing the services supplied, the gross or net consideration, and the tax paid or payable. If you have not yet registered, do so as soon as possible; late registration attracts penalties.

Set Up Payment Mechanisms

Equalisation levy and DST are usually self-assessed and remitted by you, the supplier. You must reserve the amount as you invoice your Indian customers, remit it to the Indian tax authority on the due date (usually quarterly or annually), and report it in your compliance filings. This is a cash-flow obligation that is often overlooked by founders who focus on income tax alone.

Common Pitfalls and Risk Areas

Many cross-border companies stumble because they assume GST covers their digital service tax obligation. It does not. A company registered for GST in India still owes equalisation levy and DST on services supplied by its non-resident parent or sister entities.

Another common error is misclassifying the service to avoid the tax. If your service includes elements of advertising, marketplace, and SaaS, the highest applicable rate may apply to the full amount, not just the subset you consider “core”. The tax authority takes a commercial substance approach, not a form-based classification.

Intra-group exemptions are also frequently claimed incorrectly. Simply having a related subsidiary does not exempt a transaction. The exemption applies only if the conditions—related entity, supply to a related entity, no consideration or arm’s length consideration, proper documentation—are all met and documented contemporaneously.

Cross-Border Compliance and Professional Guidance

The intersection of equalisation levy, DST, GST, and income tax creates a complex compliance matrix. If your company operates across borders or supplies services from outside India to Indian customers, the rules interact in ways that require careful mapping. Our full suite of services includes international tax and transfer pricing advice specifically designed to handle these layered obligations.

A structured approach—mapping your service categories, verifying exemptions, setting up compliant payment and filing processes, and reviewing your related-entity transactions—can avoid penalties, interest, and reputational risk. Most multinationals and cross-border startups benefit from a dedicated review in their first year of Indian operations and then annual monitoring as the rules evolve.

Talk to AeTx About Your Specific Position

If you are uncertain whether equalisation levy or DST applies to your company, or if you need to set up compliant processes, reach out to AeTx on WhatsApp at +91 9810 555 783. Our team can review your service offerings, calculate your obligations, and help you register and file correctly.

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