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Digital Tax on Goods and Services in India

Digitisation  has  changed the pace of our lives and has undoubtedly made it better. It is evident that the wave of consumerism specific to the digital world has been increasing manifold. 

In the current era driven by technological advancement we have all become digital producers and consumers. We all have posted photos on Instagram, thereby becoming digital producers and similarly, we have consumed hours of content over our favorite streaming platforms.

By being consumers and producers of digital goods, one can say we have become traders of digital goods. You must have not realised but taxation follows closely behind every trade, including that of digital goods!

Are you aware about the taxes that you pay when you consume your favourite TV show over the internet? Yes, you read it right. We often pay a tax called Digital Tax on these platforms. Let’s dive in a little deeper to understand what this Digital Tax is all about.

What is Digital Tax?

Digital tax is nothing but simply the tax to be paid on the trade of digital goods and services. India has its own digital tax called the equalisation levy which was introduced in April 2020. 

It is important to note that the tax was introduced for foreign e-commerce enterprises who conduct business in India. It was therefore introduced to  level the playing field for local businesses to compete against their foreign counterparts. 

How Much is the Digital Tax?

For the digital tax to apply, there are two criterias to be met. First, the goods or services must be provided by a non-resident. Second, such goods or services must be sold on a foreign ecommerce platform . 

If those two criterias are met, a  digital tax or equalisation levy will be charged at the rate of 2% on the transacted amount. 

Who pays the Digital Tax?

Essentially, the seller of goods and services will be charged with the tax and will have to pay for it. Provided that the two criterias mentioned above are met. Therefore, if an Indian resident or Indian permanent establishment sells goods and services on the foreign ecommerce platform, the digital tax of two percent is not levied. 

The latest news that has been creating buzz is that from April 2022, overseas entities that do not have any physical presence in India will also be charged Digital Tax. However, they will be charged this tax only  if they derive significant financial benefit from Indian customers. 

This will largely affect technology giants like Facebook Inc., Google, Inc., Alibaba Group Holding Ltd. etc. 

Again, it is important to note that no tax will be levied on any goods and services sold by a resident. This is inline with intent of the legislation of protecting the economic interests of Indian sellers and e-commerce websites . 

Threshold limit for Digital Tax

Now, the tax will not be levied on all overseas entities. Additionally, the digital tax will be levied basis in the following manner: 

Revenue/ Transaction Threshold: 

Non-resident seller whose revenue exceeds INR 2 crore for transactions in respect of goods, services or property with any person in India will be liable to pay the digital tax Transaction on data or software will also be considered under the definition of transaction for taxation purposes. 

User Threshold: 

Another threshold is on the e-commerce entity. For any entity that systematically and continuously does business with more than 3 lakh users in India will come under the scope of the Digital Taxation.

Will the consumer pay for Digital Tax?

The regulations do not tax the consumers directly, as is in the case of most of such tax rules. However, with an increase in taxation on transactions it is expected that the suppliers  of such goods and services hike their price in order to cover for the added tax they would have to pay on it.

So as a consumer even though you are not directly taxed you end up paying the tax indirectly at the time of purchase . 

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