The Death of the Equalisation Levy Pending Assessments, Sunset of Section 10(50), Withholding Controversies, the Foreign Tax Credit Gap for Digital Services Already Levied Abroad-Complete Withdrawal

Summary

The Finance Act 2025, passed by the Lok Sabha in March 2025, completed the unwinding of India's Equalisation Levy regime. Chapter VIII of the Finance Act 2016 has been amended to provide that no equalisation levy shall apply to any consideration received or receivable on or after 1st April 2025. Correspondingly, Section 10(50) of the Income-tax Act 1961 - which exempted income chargeable to equalisation levy from income-tax - will cease to apply from Assessment Year 2026-27 onwards. This article analyses the transitional fallout: the legal status of pending assessments and refund claims for pre-withdrawal periods; the sunset clause architecture of Section 10(50); withholding and classification controversies on straddle transactions spanning the transition date; the Foreign Tax Credit (FTC) gap where non-residents have paid equivalent digital services taxes in their home jurisdictions on the same receipts; and the mapping of the now-repealed regime into the Income-tax Act 2025. The article concludes with four specific CBDT recommendations to prevent a wave of transitional disputes.

1. The Problem

The Equalisation Levy (EL) was introduced by Chapter VIII of the Finance Act 2016 as a 6 per cent charge on consideration received by non-residents for online advertisement services paid by Indian residents for business purposes. The Finance Act 2020 expanded the scope to include a 2 per cent levy on e-commerce supply of goods or services by non-resident e-commerce operators to specified Indian persons. The Finance (No. 2) Act 2024 abolished the 2 per cent e-commerce EL with effect from 1st August 2024. The Finance Act 2025 has now completed the unwinding by withdrawing the residual 6 per cent EL on online advertisement services with effect from 1st April 2025.

The withdrawal itself has been widely welcomed - the EL had faced persistent criticism as a unilateral measure that conflicted with the Pillar One multilateral framework, triggered reciprocal tensions with trading partners, and imposed administrative complexity. However, the transitional questions arising from the withdrawal have received limited analytical attention. Three categories of taxpayers face immediate uncertainty: Indian payers who withheld or should have withheld EL on pre-1 April 2025 payments; non-resident recipients who may have EL refund or credit claims pending; and Indian and non-resident entities with straddle transactions whose consideration spans the transition date.

2. The Statutory Architecture of the Withdrawal

2.1 Amendments to Chapter VIII of Finance Act 2016

The Finance Act 2025 amended Sections 163 and 165 of the Finance Act 2016 to provide that no equalisation levy shall apply to any consideration received or receivable on or after 1st April 2025. The amendment does not repeal Chapter VIII retrospectively - it operates on a date-of-consideration trigger. Consideration received or receivable before 1st April 2025 remains subject to EL; consideration on or after that date is outside the levy.

2.2 Sunset of Section 10(50) of the Income-tax Act

Section 10(50) of the Income-tax Act 1961 provides an exemption from income-tax for any income arising from specified services chargeable to equalisation levy. The Finance Act 2025 has inserted a sunset clause in Section 10(50) providing that the exemption shall not apply from Assessment Year 2026-27. The practical effect is that income received on or after 1st April 2025, which would have been exempt under Section 10(50) had EL continued, now falls within the normal income-tax framework - potentially triggering Section 9 deeming provisions, PE-based taxation under Article 7, or royalty/FTS taxation under Article 12 of the applicable treaty.

2.3 Mapping to the Income-tax Act 2025

The Income-tax Act 2025, effective 1st April 2026, does not reintroduce any equalisation levy equivalent. Section 10(50) of the old Act has no corresponding provision in the new Act - reflecting the complete unwinding. Practitioners should note that non-residents whose Indian receipts were previously EL-taxed (and therefore income-tax exempt) must now classify their income under Section 9 read with the applicable DTAA from 1st April 2025 onwards.

3. The Transitional Timeline

4. The Analysis - Five Transitional Dimensions

4.1 Dimension 1 - Pending Assessments and Refund Claims

Equalisation Levy assessments for periods up to 31st March 2025 continue to be governed by the pre-amendment Chapter VIII of the Finance Act 2016. The Commissioner (Appeals) and the ITAT retain jurisdiction over EL disputes arising from these periods. The complete withdrawal of the levy with effect from 1st April 2025 does not invalidate or extinguish pending demands or refund claims for earlier periods. Practitioners advising on such matters must continue to apply the pre-withdrawal statutory framework, including the 6 per cent rate for online advertisement services and the 2 per cent rate for e-commerce (pre-1 August 2024).

4.2 Dimension 2 - Section 10(50) Sunset and Its Consequences

The sunset of Section 10(50) effective Assessment Year 2026-27 is the most consequential transitional issue. Consider a non-resident e-commerce operator that, under the pre-2024 regime, paid 2 per cent EL on Indian receipts and was exempted from income-tax under Section 10(50). Post-sunset, the same receipts fall within Section 9(1)(i) read with Explanation 2A (Significant Economic Presence) or the applicable treaty provisions. The non-resident may now face income-tax liability on receipts that were entirely outside the income-tax net until 31st March 2025. The practical question is whether the non-resident is now deemed to have 'become taxable' prospectively from 1st April 2025 or whether the earlier EL period is relevant to any SEP threshold computation.

4.3 Dimension 3 - Withholding Controversies on Straddle Transactions

Indian payers face immediate classification challenges on straddle transactions: where a contract runs across the transition date, or consideration is paid on or after 1st April 2025 for services rendered before that date, the question of whether EL or income-tax withholding applies depends on the date-of-consideration test. The Finance Act 2025 amendment uses 'received or receivable on or after 1st April 2025' as the trigger - aligning with the accrual of the right to receive rather than the underlying service date. Practitioners should note that advance payments received before 1st April 2025 remain EL-chargeable even if the service is delivered after that date.

4.4 Dimension 4 - The Foreign Tax Credit Gap

Several non-residents previously subject to Indian EL may have, in their home jurisdictions, faced Digital Services Taxes (DST) or similar unilateral measures on the same underlying receipts. The combined burden was not always relievable because EL was not creditable against DST in most home jurisdictions (and vice versa). With India's withdrawal, the non-resident now faces only home-country taxation on pre-transition receipts and, potentially, Indian income-tax on post-transition receipts under Section 9 or DTAA. The FTC gap for the pre-transition period (where both EL and foreign DST were paid on the same receipts) is legally unaddressed. A Mutual Agreement Procedure under the applicable DTAA may be the only remedy - but not all treaties have functional MAP mechanisms for EL-DST overlap.

4.5 Dimension 5 - Residual Compliance Obligations

Entities that paid or withheld EL during the transition period (up to 31st March 2025) remain subject to the residual compliance obligations - filing Form 1 (Equalisation Levy Statement) for FY 2024-25, maintaining records, and responding to any assessment notices. The CBDT has not, as of the date of this article, issued a comprehensive transitional circular addressing the winding-down of compliance requirements. Practitioners should ensure that FY 2024-25 compliance is completed within prescribed timelines despite the substantive withdrawal.

5. Before and After - Equalisation Levy Obligations Summary

6. The Solution - Compliance Roadmap

6.1 For Indian Payers

Payers should conduct an immediate audit of their non-resident service contracts to identify: (a) any payments that were being made under EL with Section 10(50) exemption; (b) the new classification of such payments under Section 9 or the applicable DTAA from 1st April 2025; and (c) the withholding rate applicable under Section 195 read with the DTAA. For online advertisement services previously subject to 6 per cent EL, the post-transition tax treatment depends on whether the non-resident constitutes a PE or whether the payment is royalty/FTS. Lower withholding certificates under Section 197 should be obtained where treaty benefits reduce the withholding rate.

6.2 For Non-Resident Recipients

Non-residents should review their Indian engagement structures to address three questions: (i) Are receipts post-1 April 2025 taxable in India under Section 9, particularly under the Significant Economic Presence threshold? (ii) If yes, does the applicable DTAA provide relief, particularly through PE absence or royalty/FTS classification with concessional treaty rate? (iii) Should a Permanent Establishment Risk Assessment be conducted given the changed compliance landscape?

6.3 For Entities with Pending EL Assessments

Pending EL assessments, appeals, and refund claims for periods up to 31st March 2025 remain governed by the pre-amendment provisions. Practitioners should ensure timely filing of statements, responses to notices, and appeals within the original time limits. The complete withdrawal of the levy does not extinguish pending demands or claims.

7. Key Takeaways for Practitioners

First, the withdrawal of the Equalisation Levy from 1st April 2025 is complete but not retrospective. Pre-transition receipts remain EL-chargeable; post-transition receipts fall within the normal income-tax regime. Practitioners must apply the correct regime based strictly on the date of consideration received or receivable.

Second, the sunset of Section 10(50) from Assessment Year 2026-27 creates a material shift for non-resident recipients. Income-tax liability under Section 9 (including Significant Economic Presence), Section 115A, and the applicable DTAA must be re-assessed for each non-resident engagement from 1st April 2025 onwards.

Third, straddle transactions require careful contract review. The 'consideration received or receivable' trigger is the legal test - not the date of service rendering. Advance payments received before 1st April 2025 remain EL-chargeable even for services delivered later.

Fourth, non-residents with pre-transition EL burdens overlapping with foreign Digital Services Tax should evaluate whether Mutual Agreement Procedure under the applicable DTAA offers relief. Domestic FTC mechanisms generally do not extend to EL.

8. Conclusion and CBDT Recommendations

The unwinding of the Equalisation Levy is a significant step toward alignment with the multilateral Pillar One framework and removes a long-standing source of friction with trading partners. However, the transitional fallout will produce disputes and compliance friction unless addressed proactively. The author makes the following specific recommendations to CBDT:

(i) Issue a comprehensive transitional Circular under Section 119 of the Income-tax Act addressing the treatment of straddle transactions, pre-transition advance payments, and consideration-timing questions - with illustrative examples;

(ii) Clarify that receipts taxed under EL for periods up to 31st March 2025 shall not be aggregated with post-transition receipts for the purpose of computing the Significant Economic Presence threshold under Section 9(1)(i) Explanation 2A;

(iii) Consolidate the residual EL compliance framework - specifically the Form 1 Statement filing, assessment procedures, and appeal timelines - into a single standalone Notification for post-withdrawal administration; and

(iv) Provide a framework for foreign tax credit or MAP relief for non-residents who suffered overlapping EL and foreign DST on the same pre-transition receipts, to avoid double taxation on the same underlying income.

With these clarifications, the transition from the Equalisation Levy regime to full income-tax compliance can proceed without producing the litigation wave that accompanied earlier unilateral tax measures. The Income-tax Act 2025 provides a clean platform for this transition - but the practical success of the withdrawal will depend on the quality and timeliness of the CBDT's transitional guidance.