US claims India will remove digital services tax: Here's what it means

India has already abolished existing equalisation levies by April 2025, which were highlighted as a concern by the United States Trade Representative

The United States on Monday claimed that India will remove its digital services tax (DST) under the recently negotiated trade deal between the two countries.

 

The claim comes just a week after India and the US signed a trade agreement under which Washington agreed to cut its tariffs on Indian goods to 18 per cent from 25 per cent.

 

Here is what digital services taxes are, what India had imposed in the past, and what has already been withdrawn.

What did the US say?

In a fact sheet released on Monday, the White House said, “India will remove its digital services taxes and commit to negotiate a robust set of bilateral digital trade rules that address discriminatory or burdensome practices and other barriers to digital trade, including rules that prohibit the imposition of customs duties on electronic transmissions.”

 

 

India’s official statement on the trade deal does not explicitly mention the removal of any digital services tax. New Delhi has said it aims to reduce barriers to digital trade, but has not referred to dismantling DST as part of the agreement.

 

Notably, India has already abolished the equalisation levies that were repeatedly highlighted as a concern by the United States Trade Representative (USTR).

What are digital services taxes?

A digital services tax is imposed on foreign companies that earn revenue from a country’s users through digital services, even if the company does not have a physical presence there.

 

Such taxes typically target online advertising, ecommerce platforms, digital marketplaces and other internet-based services. Companies affected globally include firms such as Google, Meta, Amazon and other large technology platforms.

India’s equalisation levy explained

India introduced the Equalisation Levy through the Finance Act, 2016, to tax certain digital transactions involving non-resident companies.

 

Initially, the levy applied only to online advertising services provided by foreign firms to Indian businesses.

 

In April 2020, the scope was expanded to cover ecommerce supply of goods and services facilitated by non-resident digital platforms.

What transactions were taxed?

Under the equalisation levy framework:

• Online advertising services attracted a 6 per cent tax on payments made to foreign companies for digital ad space and related services.
• Ecommerce supply and services were subject to a 2 per cent tax on the value of goods or services sold or facilitated online by foreign ecommerce operators.

Why the US objected to India’s digital tax

In January 2021, the USTR released a report concluding that India’s digital services tax discriminated against US companies.

 

“India’s DST is discriminatory on its face. The law explicitly exempts Indian companies, while targeting non-Indian firms,” the USTR said.

 

The report argued that the tax contravened international tax principles, increased compliance burdens and exposed US companies to double taxation. The USTR estimated that the levy could cost US firms more than $30 million annually.

India has already scrapped the equalisation levy

India has dismantled the equalisation levy in phases:

• The 2 per cent tax on ecommerce supply of goods and services ended on August 1, 2024.
• The 6 per cent levy on online advertising was scrapped from April 1, 2025.

With this, India has fully removed its standalone digital services tax regime. The decision was aimed at aligning domestic tax rules with evolving global norms and reducing trade friction with major partners.

 

The withdrawal of the 6 per cent ad levy was announced by Finance Minister Nirmala Sitharaman in the FY26 Budget, amid rising concerns over reciprocal tariffs under US President Donald Trump.

What changes for US tech companies

US-based firms such as Google, Meta and Amazon are among the biggest beneficiaries of the levy’s removal. According to India Briefing, these companies together account for around 65 per cent of India’s digital advertising market, estimated at about $5.82 billion.

 

With the levy withdrawn, advertisers no longer face the additional tax burden, lowering costs and improving margins for global digital platforms.

Does India still tax foreign digital companies?

Yes. The removal of the equalisation levy does not mean overseas digital firms are untaxed in India.

 

India introduced the Significant Economic Presence (SEP) framework in 2018, which creates tax liability for non-resident entities that cross specified thresholds of revenue or user interaction in India. While designed for the digital economy, its broad scope allows application beyond purely digital businesses.

 

Separately, under the GST regime for online information and database access or retrieval (OIDAR) services, foreign and domestic digital service providers must pay 18 per cent GST on services consumed in India. This applies to streaming platforms, cloud services, software subscriptions, online gaming and digital advertising, among others.

 

Services such as Netflix, Amazon Prime Video, Adobe Creative Cloud and Microsoft 365 fall under this framework.