Is the equalisation levy still applicable in 2026?

No. The 2 percent equalisation levy on e-commerce supply of goods and services was withdrawn from 1 August 2024 as India moved toward alignment with the OECD multilateral framework. The earlier 6 percent levy on online advertising paid to non-residents continues until further notice and remains a key consideration for ad-tech intermediaries.

What is Significant Economic Presence in Indian tax law?

Significant Economic Presence (SEP) under Section 9 of the Income Tax Act treats a non-resident as having a business connection in India if it has transactions in goods, services, or property with Indian residents exceeding the prescribed monetary threshold, or systematically engages Indian users above a prescribed user-base threshold, even without a physical presence.

How is GST applied to cross-border SaaS exports?

SaaS exports from India to overseas customers qualify as zero-rated supplies under Section 16 of the IGST Act. Exporters can choose to supply under a Letter of Undertaking without payment of IGST and claim refund of accumulated input tax credit, or pay IGST and claim refund of the tax paid. Robust foreign exchange receipt documentation is essential.

Does India follow the global minimum tax rules?

India has signalled adoption of the OECD Pillar Two 15 percent global minimum tax for multinational enterprises with consolidated annual revenue above EUR 750 million. Indian subsidiaries of large global groups will see top-up tax mechanics applied, while small and mid-sized domestic startups remain outside the scope.

Taxation & Digital Economy

India's digital economy tax framework in FY 2026-27 rests on six interlocking levers: income tax on business connections and Significant Economic Presence (SEP), the surviving 6 percent equalisation levy on online advertising, 18 percent GST on OIDAR and digital services, TDS obligations under Sections 194-O, 194-R, 194-S, and 195, treaty-based withholding optimisation, and Pillar Two global minimum tax for large multinationals. Whether you run a domestic SaaS platform, a cross-border marketplace, or a content-creator business, each lever pulls on a different revenue stream — and misreading even one creates real, quantifiable liability.

The Direct Tax Architecture: Three Tests That Determine Your Exposure

Direct taxation of digital businesses flows from a single question: where is the income earned, and by whom? The answer differs sharply depending on whether the entity is a resident or non-resident.

Residents: Global Taxation at Applicable Rates

Indian companies pay tax on their global income. For AY 2027-28, a domestic company that has opted for the concessional regime under Section 115BAA pays an effective rate of 25.17% (22% base + 10% surcharge where income exceeds Rs. 10 crore + 4% health and education cess). Startups with approval under Section 80-IAC can claim a 100% deduction on profits for any three consecutive assessment years out of the first ten years from incorporation, provided the entity was incorporated on or before 31 March 2030.

Transfer pricing rules under Sections 92–92F apply to any international transaction with an associated enterprise. For digital businesses, the most contested transfer pricing issues involve cost-sharing agreements for technology platforms, software licensing between group entities, and intra-group charges for shared cloud infrastructure.

Non-Residents: Business Connection and the SEP Test

For non-residents, the primary question is whether income has a business connection in India under Section 9(1)(i) of the Income Tax Act, 1961. The Significant Economic Presence (SEP) rule — introduced by the Finance Act 2018 and operationalised through Rules 11UB and 11UC — treats a non-resident as having a business connection in India if:

Revenue from India-based transactions exceeds Rs. 2 crore in the relevant year, or
The non-resident systematically and continuously solicits business or interacts with more than 3 lakh users in India in that year.

SEP does not tax the non-resident's entire global revenue. Only income reasonably attributable to Indian operations is brought to tax, requiring a detailed functional and comparables analysis. India has deferred SEP enforcement for treaty-protected non-residents pending resolution of OECD Pillar One (Amount A reallocation). However, domestic-law exposure accrues on the books every year, and Indian authorities have issued protective assessments in the past. Foreign platforms crossing these thresholds should maintain attribution documentation now — not when they receive a notice.

Who must map SEP exposure immediately:

Foreign SaaS platforms with Indian subscriber bases approaching 3 lakh users
Global marketplaces where GMV from Indian sellers exceeds Rs. 2 crore
Streaming, gaming, and ed-tech platforms collecting subscriptions from Indian consumers

GST on Digital Services: OIDAR, SaaS Exports, and TCS Obligations

What Qualifies as OIDAR

Online Information Database Access and Retrieval (OIDAR) services are defined under Section 2(17) of the IGST Act, 2017. The defining characteristics are: delivery over the internet, substantial automation, and minimal human intervention at the point of supply. Examples include:

Cloud SaaS subscriptions and API access
Online gaming, e-learning platforms, and digital libraries
Music, video, and content streaming
Online advertising services
Website hosting and storage

Foreign Providers: Mandatory Registration, No Turnover Threshold

A foreign supplier of OIDAR services to non-taxable online recipients (consumers, not GST-registered businesses) in India must register under GST regardless of turnover. The Rs. 20 lakh threshold exemption does not apply. Registration is completed through Form GST REG-10 on the GST portal. Monthly returns are filed in GSTR-5A, due on the 20th of the month following the tax period. The tax payable is 18% IGST.

If a foreign OIDAR supplier provides services exclusively to GST-registered Indian businesses (B2B), registration is not required — the Indian recipient handles GST under the reverse charge mechanism (RCM) under Section 5(3) of the IGST Act read with Notification 10/2017-IGST.

Late-filing cost example: A foreign platform with Rs. 40 lakh monthly IGST liability that files GSTR-5A 45 days late incurs: interest at 18% per annum on Rs. 40 lakh for 45 days = Rs. 88,767 in interest, plus a late fee of Rs. 200 per day × 45 days = Rs. 9,000. Total extra cost: approximately Rs. 97,767 — avoidable with a single automated reminder set for the 18th of each month.

Domestic SaaS Providers: GST at 18% and Section 52 TCS

Domestic SaaS and digital content platforms charge 18% GST on most services. E-commerce operators that facilitate third-party supplies must collect Tax Collected at Source (TCS) under Section 52 of the CGST Act at 1% of the net taxable value (0.5% CGST + 0.5% SGST for intrastate; 1% IGST for interstate). TCS is deposited by the 10th of the following month and reported in GSTR-8.

Exporting SaaS: Zero-Rating and the LUT Refund Route

Cross-border SaaS exports qualify as zero-rated supplies under Section 16 of the IGST Act, giving you two routes:

LUT route — Export without payment of IGST and claim a refund of accumulated ITC via Form RFD-01 on the GST portal. This preserves working capital and is the standard approach.
With IGST payment — Pay IGST on export invoices and claim a refund of the tax paid. Useful when the exporter has minimal ITC to accumulate.

The Letter of Undertaking (LUT) must be renewed annually in Form GST RFD-11 before the first export invoice of the new financial year. Missing this window forces you onto the IGST-payment route, creating a cash-flow drag and extra refund paperwork. Refund applications under RFD-01 must be filed within two years from the relevant date.

TDS Touchpoints: Four Sections Every Digital Business Must Wire Into Its Billing System

Section 194-O: E-Commerce Operators and Their Participants

Every e-commerce operator must deduct 1% TDS on the gross amount of sales, services, or both, facilitated through its digital platform on behalf of an e-commerce participant, at the time of credit or actual payment — whichever is earlier.

Threshold: No deduction is required if the participant is a resident individual or HUF, the aggregate amount during the year does not exceed Rs. 5 lakh, and the participant has furnished a valid PAN or Aadhaar.

Rate without PAN: 5% under Section 206AA.

Deposit due date: 7th of the month following deduction (30 April for deductions made in March). Reported quarterly in Form 26Q; TDS certificate issued in Form 16A.

Operators who run monthly settlement cycles must build the Rs. 5 lakh threshold check into the settlement engine at the individual participant level. A common error is applying TDS on the first payment in the financial year before the annual aggregate is clear — correct practice is to deduct from the payment that causes the cumulative total to cross the threshold.

Section 194-R: Influencer Barter and Free-Product Arrangements

Section 194-R applies to any person providing a benefit or perquisite — in cash or kind — to a resident that arises from a business or profession, where the aggregate value exceeds Rs. 20,000 in a financial year. The TDS rate is 10%.

The most common trigger in digital marketing is a brand sending a free product or an all-expenses-paid event to a content creator or influencer. The TDS must still be deducted or paid — and since the benefit is non-cash, the brand typically either:

Recovers the TDS amount from a subsequent cash payment to the influencer, or
Grosses up the value and absorbs the tax cost itself.

CBDT Circular No. 12/2022 provides guidance on valuing non-cash benefits. Failure to deduct attracts disallowance under Section 40(a)(ia) for the payer in addition to interest and penalty.

Section 194-S: Virtual Digital Assets

Section 194-S applies to the transfer of a Virtual Digital Asset (VDA) — defined under Section 2(47A) to include cryptocurrency and NFTs — with TDS at 1% of the consideration.

Threshold for specified persons (individuals/HUF below the tax audit threshold): Rs. 50,000 per financial year
Threshold for others: Rs. 10,000 per financial year
For non-cash VDA transfers (crypto-to-crypto swap), the deductor must deposit the tax before releasing the in-kind consideration to the transferor.

Crypto exchanges operating in India must file Form 26QF for on-platform transactions. Peer-to-peer transfers reportable by the buyer are covered under Form 26QE. Section 115BBH taxes VDA gains at a flat 30% (plus surcharge and cess) with no deductions except the cost of acquisition — there is no set-off of losses from one VDA against another.

Section 195: Non-Resident Vendor Payments

When you pay a foreign SaaS vendor, software licensor, or technical services provider, Section 195 TDS is triggered unless:

A tax treaty article exempts the payment (typically where the foreign entity has no PE in India and the income is business income), or
A lower/nil withholding certificate is obtained from the Assessing Officer under Section 197.

Applicable treaty rates for FY 2026-27 (where the treaty article applies):

Payment type	India-USA	India-Singapore	India-UK
Royalty	15%	10%	15%
FTS	15%	10%	15%
Business income (no PE)	Nil	Nil	Nil

The make-available test under the India-USA, India-Singapore, and India-UK DTAAs restricts FTS to services that actually transfer a technical skill or knowledge to the Indian payer. A standard cloud subscription where the foreign provider operates the infrastructure and the Indian company simply uses output does not meet this test — it is business income of the foreign vendor, taxed at nil in India if the vendor has no PE here.

Form 15CA (filed online on the Income Tax portal) and Form 15CB (CA certificate for remittances above Rs. 5 lakh in purpose-code categories requiring certification) must be completed before every foreign remittance. Omitting Form 15CA attracts a penalty of Rs. 1 lakh per default under Section 271-I.

The Equalisation Levy Landscape After August 2024

What Was Withdrawn and What Remains

The 2% equalisation levy on e-commerce supply of goods or services by non-resident e-commerce operators was withdrawn effective 1 August 2024 under Finance Act 2024, marking India's partial alignment with the Pillar One multilateral framework. Liabilities that accrued before 1 August 2024 — reported in Form-1 (Equalisation Levy) — remain subject to assessment for up to six years, and businesses must retain all payment evidence, contractual documentation, and jurisdictional analysis for that period.

The 6% equalisation levy on online advertising introduced by Finance Act 2016 continues to apply in full force for FY 2026-27. It applies to payments made by Indian residents or Indian PEs of non-residents to non-resident service providers for online advertising, provision of digital advertising space, or related facilitation services.

Key mechanics of the 6% levy:

Who deducts: The Indian payer (company, firm, or individual in business)
Rate: 6% of the gross payment
Deposit due date: 7th of the month following the month of deduction; for deductions in March, by 31 March itself
Annual statement: Form-1 filed by 30 June after close of the financial year
Exemption: Aggregate payments below Rs. 1 lakh in a financial year; or where the non-resident has a PE in India (these fall under normal income tax TDS instead)

Practical trap for ad agencies: The shift from 2% to nil and the continuation of 6% are coded separately. Agencies that mapped both levies into the same accounts-payable bucket for Google and Meta campaigns must audit their FY 2025-26 and 2026-27 coding immediately to avoid deducting 0% where 6% applies (ad services) or 6% where 0% applies (now-withdrawn e-commerce levy).

Pillar Two and the Global Minimum Tax: Who Needs to Care

The OECD/G20 Pillar Two framework sets a 15% global minimum effective tax rate for Multinational Enterprise (MNE) groups with consolidated annual revenue above EUR 750 million (approximately Rs. 6,700 crore at current rates). India has signalled adoption through a Qualified Domestic Minimum Top-Up Tax (QDMTT), collecting any shortfall domestically rather than ceding collection to another jurisdiction.

Who is in scope for FY 2026-27 planning:

Indian subsidiaries of large US, EU, or Asian tech conglomerates whose group revenue exceeds EUR 750 million
Indian MNE groups with subsidiaries in low-tax jurisdictions (Mauritius, UAE, Ireland, Netherlands) where the effective tax rate on profits falls below 15%

Who is out of scope: Virtually every Indian startup and mid-market digital company. The EUR 750 million revenue threshold is far above the operating scale of most Indian SaaS, fintech, or ed-tech businesses.

However, if your Indian entity is a subsidiary of a global group above the threshold, you will need to: (a) compile GloBE (Global Anti-Base Erosion) income and tax data for the Indian entity, (b) calculate the Effective Tax Rate (ETR) under GloBE rules — which use GloBE adjusted financial accounts, not taxable income — and (c) model whether your Indian operations trigger a top-up in any jurisdiction operating an Income Inclusion Rule (IIR) or Undertaxed Profits Rule (UTPR).

Begin the data-mapping exercise now. The first Indian QDMTT returns will require granular jurisdiction-by-jurisdiction data that most ERP systems are not currently configured to produce without customisation.

Permanent Establishment Exposure in a Digital Operating Model

The Permanent Establishment (PE) concept under India's 96 tax treaties was designed for manufacturing plants and branch offices. Digital models stress-test every standard PE type:

Fixed Place PE: Cloud infrastructure sitting in Indian data centres or edge servers — if owned or exclusively controlled by the foreign enterprise — can constitute a fixed place. Colocation agreements must vest operational control clearly with the Indian data centre operator.
Agency PE: If an Indian company's business development team negotiates and concludes contracts exclusively on behalf of a foreign group entity and has authority to bind that entity, an Agency PE is triggered. Document approval workflows: does the Indian executive sign, or does the contract travel to a foreign office for execution?
Service PE: Foreign technical staff spending more than the treaty-prescribed period in India (90 days or 183 days depending on the specific treaty) performing services create a Service PE. Track passport records and project billing by jurisdiction.

Transfer pricing documentation — Master File, Local File, and Country-by-Country Report (CbCR) where the consolidated group revenue exceeds Rs. 5,400 crore — must be consistent with the PE analysis. An inconsistent file that shows substantial Indian functions in the TP study while the direct tax position claims no PE is a textbook audit trigger.

Worked Example: A Mid-Size SaaS Platform's Complete Tax Map for FY 2026-27

Company: DataNest India Pvt. Ltd. — a B2B analytics SaaS platform, opted for Section 115BAA.

Revenue for FY 2026-27:

Domestic enterprise clients (GST-registered): Rs. 5.5 crore
Export clients (USA and Singapore, zero-rated): Rs. 2.5 crore
Income facilitated via foreign marketplace on DataNest's behalf: Rs. 1 crore

GST position:

Domestic invoices: Rs. 5.5 crore × 18% = Rs. 99 lakh GST collected, reported in GSTR-1 and GSTR-3B monthly.
Exports: Zero-rated under LUT. ITC accumulated on cloud hosting, software licences, and rent. RFD-01 refund filed quarterly; estimated refund Rs. 18 lakh for FY 2026-27.
LUT filed in Form GST RFD-11 for FY 2026-27 before 1 April 2026 — no IGST payment needed on export invoices.

Section 195 on US cloud provider payment (Rs. 60 lakh): The service is a standard infrastructure subscription. It fails the make-available test under Article 12 of the India-USA DTAA — no technical knowledge is transferred; DataNest merely consumes output. Characterised as business income with no PE in India: TDS nil. Form 15CA (Part C) filed before remittance; Form 15CB obtained from a CA as remittance exceeds Rs. 5 lakh.

Section 194-O from foreign marketplace (Rs. 1 crore GMV): Foreign marketplace deducts 1% TDS = Rs. 1 lakh. DataNest claims this as advance tax credit in AY 2027-28 through the TDS certificate (Form 16A). DataNest confirms that the foreign operator has registered under Indian law and will deposit TDS with the Indian government — without that deposit, the credit is disallowed.

Section 194-R on influencer/analyst programme: DataNest sends free annual subscriptions (value Rs. 30,000 each) to 9 industry analysts. Aggregate per person: Rs. 30,000 > Rs. 20,000 threshold. TDS at 10% = Rs. 3,000 per analyst. Total TDS liability: Rs. 27,000, reported in Form 26Q for Q3 FY 2026-27. DataNest nets the TDS off the analysts' subsequent cash consulting fees.

Advance tax for FY 2026-27: | Instalment | Due Date | Cumulative % | |---|---|---| | 1st instalment | 15 June 2026 | 15% | | 2nd instalment | 15 September 2026 | 45% | | 3rd instalment | 15 December 2026 | 75% | | Final instalment | 15 March 2027 | 100% |

Shortfall in any instalment attracts interest under Section 234C at 1% per month. At DataNest's estimated tax liability of Rs. 50 lakh, a 15% shortfall in the first instalment (Rs. 7.5 lakh) for three months costs Rs. 22,500 in avoidable interest.

Common Pitfalls and How to Avoid Them

1. Assuming all export payments to foreign vendors are automatically TDS-free. The domestic-law analysis under Sections 9(1)(vi) and 9(1)(vii) must be done first. Royalties and FTS can be taxable in India even without a PE. Overlay the treaty only after confirming domestic-law exposure. A blanket "no PE, no TDS" policy leads to short deductions and disallowance under Section 40(a)(ia).

2. Late GSTR-5A filings by foreign OIDAR providers. Interest at 18% per annum on unpaid tax, plus a late fee of Rs. 200 per day. On a Rs. 50 lakh monthly liability, a 60-day delay costs approximately Rs. 1.48 lakh interest plus Rs. 12,000 late fee. A calendar reminder set for the 18th of each month costs nothing.

3. Confusing the withdrawn 2% levy with the live 6% levy. The 2% e-commerce equalisation levy ended on 1 August 2024. The 6% advertising levy continues. Ad-tech intermediaries and agencies with combined accounts-payable coding must audit their GL mapping for FY 2026-27.

4. Missing the annual LUT renewal for SaaS exporters. An LUT not renewed before the first export invoice of the new financial year forces you onto the IGST-payment route and triggers a refund claim cycle. A refund blocked for 90 days on Rs. 18 lakh of IGST is Rs. 18 lakh of working capital locked at zero yield.

5. Treating 194-R and 194-O as mutually exclusive. A marketplace operator that pays a seller in cash (194-O) and also sends that seller a free product sample (194-R) faces both deductions. The two sections operate in parallel and are additive.

6. Ignoring SEP documentation because enforcement is deferred. Deferral of SEP enforcement for treaty-protected non-residents does not stop domestic-law exposure from accruing. Protective assessments have been issued. Foreign platforms crossing the 3 lakh user or Rs. 2 crore thresholds should build attribution analysis into their annual compliance calendar.

7. Omitting Form 15CA for sub-Rs. 5 lakh remittances. Form 15CB (CA certificate) is not required for many remittances below Rs. 5 lakh, but Form 15CA is still required for most categories. Omitting Form 15CA is a Rs. 1 lakh penalty per default under Section 271-I.

Key Takeaways

Six interlocking levers govern digital taxation in India for FY 2026-27: income tax and SEP, the 6% equalisation levy on online advertising (the 2% e-commerce levy was withdrawn from 1 August 2024), 18% GST on digital services, TDS under Sections 194-O / 194-R / 194-S / 195, treaty-based withholding analysis, and Pillar Two top-up tax for MNE groups above EUR 750 million.
Foreign OIDAR providers have no GST registration threshold: mandatory registration via Form GST REG-10, monthly GSTR-5A filing by the 20th, and 18% IGST are non-negotiable regardless of how small the Indian revenue base.
Section 194-O's Rs. 5 lakh individual threshold must be built into marketplace settlement engines — not applied manually after the fact — to avoid both under-deduction and excess deduction errors at scale.
The make-available test under key DTAAs (USA, Singapore, UK) can reduce foreign vendor TDS to nil for standard cloud and SaaS subscriptions, but this requires a documented analysis and proper Form 15CA/15CB filing before every remittance.
Pillar Two is operationally live only for groups above EUR 750 million consolidated revenue, but affected groups need to begin GloBE data mapping now — ERP systems rarely produce the required GloBE-adjusted figures without configuration work.
PE risk in digital models is real and multifaceted: Fixed Place PE (data centres), Agency PE (exclusive BD teams), and Service PE (long-stay foreign technical staff) must be assessed annually and aligned with transfer pricing documentation.
Design tax into your digital architecture from day one: revenue-stream characterisation, OIDAR registration triggers, influencer perquisite captures, and SEP thresholds are active obligations — retroactive restructuring after a notice is invariably more expensive than proactive compliance.

Taxation & Digital Economy