Equalisation Levy in 2026 — 6% on online advertising payments, history of EL 2.0 at 2%, compliance procedure, penalties and OECD Pillar One interplay.
The Equalisation Levy, introduced by the Finance Act, 2016 and expanded by the Finance Act, 2020, was India's interim mechanism to tax certain cross-border digital revenue earned by non-residents from Indian payers and users. Following the OECD Pillar One framework and Union Budget 2024-25's phased rollback decisions, parts of the levy have been narrowed by 2026, but practitioners still need to understand its scope and history to handle legacy years and ongoing online-advertisement charges.
The two streams
- EL 1.0 (Section 165 of Finance Act, 2016) — 6% levy on consideration paid by an Indian resident or non-resident with PE in India to a non-resident for specified services, principally online advertising and digital advertising-related services, where the aggregate consideration to the non-resident exceeds ₹1 lakh in a financial year.
- EL 2.0 (Section 165A of Finance Act, 2020) — 2% levy on consideration received by a non-resident e-commerce operator from supply of goods or services to specified Indian-facing persons (residents, non-residents using Indian IP, sale of advertising targeting Indian customers); this stream was withdrawn for transactions on or after the date specified in the relevant Finance Act, with legacy compliance still applicable for earlier periods.
EL 1.0 — current relevance
EL 1.0 on online advertising remains in force in 2026 for payments by Indian residents to non-resident service providers exceeding the ₹1 lakh threshold. The Indian payer deducts 6% at source from the gross consideration and deposits it to the credit of the central government. The recipient is exempt from income-tax on the same income under Section 10(50) of the Income-tax Act — a deliberately designed non-overlap.
Procedural compliance for the payer
- Identify each non-resident vendor providing online advertising or related digital ad services.
- Withhold 6% of the gross consideration at the time of credit or payment, whichever is earlier.
- Deposit the levy by the 7th of the following month using Challan ITNS-285.
- File the Equalisation Levy Statement in Form 1 by 30 June following the financial year (electronically with DSC).
- Deduction in the payer's books is allowed only if the levy is paid; failure renders the expense disallowed under Section 40(a)(ib) of the Income-tax Act.
- Maintain documentation of foreign vendor invoices, services rendered, IP confirmation and TDS reconciliations.
EL 2.0 — legacy and transition
EL 2.0 at 2% applied to non-resident e-commerce operators on a much broader base of transactions until its phased rollback. For periods when it was in force, the operator (not the Indian payer) had primary responsibility to compute, pay (quarterly) and file Form 1. Practitioners should keep documentation for assessment-period defence even after rollback, as the period of limitation for orders/assessments remains open for several years.
Interplay with OECD Pillar One
India committed under the OECD/G20 Inclusive Framework to withdraw certain unilateral measures like EL 2.0 once Pillar One Amount A is implemented globally. As of 2026, implementation timelines are still evolving; the relationship between residual EL 1.0 (advertising) and any future Amount A application will be governed by the eventual Multilateral Convention. Until then, the existing administration of EL 1.0 continues.
Penalties for non-compliance
- Failure to deduct or pay — interest at 1% per month on shortfall and penalty equal to the levy amount.
- Failure to file Form 1 — penalty of ₹100 per day during the default period.
- Disallowance of expense under Section 40(a)(ib) in the payer's income-tax assessment.
- Prosecution risk in cases of wilful evasion (analogous to TDS provisions).
Vendor agreement clauses to insert
- Clear allocation of Equalisation Levy: gross-up where the vendor must absorb, or net-of-EL where it is a deduction.
- Withholding mechanics: timing, treasury account, reporting back to the vendor.
- Indemnity clause covering disallowance under Section 40(a)(ib) if vendor data is incorrect or PAN/foreign address evidence is not provided.
- Right to withhold payment if vendor refuses to provide the documentation needed for compliance.
- Clause acknowledging that Section 10(50) exempts the same income from Indian income tax, avoiding double-charge negotiations.
Common controversies
Three areas have repeatedly invited litigation. First, whether 'online advertising' covers algorithmic and programmatic ad placement, content sponsorship, and search marketing in the same way — the answer is increasingly yes, but contracts must be examined carefully. Second, the threshold of ₹1 lakh aggregate per non-resident per year — many companies miss aggregation across group entities of the same non-resident. Third, allocation of EL between resident and non-resident parts of the supply chain — practitioners should document the allocation methodology contemporaneously.
Conclusion
For most Indian businesses in 2026, the Equalisation Levy is a 6% reality on digital ad spend with global platforms. Build the deduction into your vendor agreements (gross-up or net-of-EL clauses), run a clean monthly compliance cycle and file Form 1 well before 30 June each year. The cost of getting it wrong is asymmetric — small headline rate, large disallowance and penalty downside.
