Polity & GovernancePriority2025-03-25

Lok Sabha Passes Finance Bill 2025

Why focus: Abolishes 6% Equalisation Levy — GS3 Economy, tests digital taxation mechanisms in How-Many-Correct format

In News

What Happened

On March 25, 2025, the Lok Sabha passed the Finance Bill 2025, incorporating 35 government amendments to conclude a major step in the Union Budget 2025-26 approval process. The most prominent amendment was the total abolition of the 6% Equalisation Levy (often called the 'Google Tax') on online advertisements by foreign digital platforms, effective April 1, 2025. Other key changes included customs duty exemptions for EV and mobile manufacturing and simplified tax compliance for offshore funds.

Why It Matters

Abolishing the digital tax removes a major trade friction point with the United States, which had previously threatened reciprocal tariffs. It signals India's commitment to aligning its domestic tax policies with the global consensus under the OECD/G20 framework, thereby improving the ease of doing business and fostering a more welcoming climate for Foreign Direct Investment (FDI).

Background

History & Context

The 6% Equalisation Levy (EL) was introduced via the Finance Act 2016 to tax cross-border digital advertising transactions, targeting non-resident tech giants like Google and Meta that generated massive ad revenues from India without a physical permanent establishment. In 2020, this was expanded with a 2% levy on e-commerce operators. The unilateral nature of the tax drew severe criticism from the US Trade Representative (USTR), which initiated a Section 301 investigation and threatened retaliatory tariffs. In response to global pressure and the OECD's Base Erosion and Profit Shifting (BEPS) Pillar One initiative—a multilateral agreement to reallocate taxing rights—India abolished the 2% e-commerce levy in August 2024. To fully resolve bilateral trade tensions and integrate into the global tax framework, Finance Minister Nirmala Sitharaman utilized the Finance Bill 2025 to completely scrap the remaining 6% levy.

What Changed

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Abolition of Equalisation Levy: Under Section 163 of the Finance Act 2016, the 6% levy on online advertisements by non-residents is abolished effective April 1, 2025.
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Consequential IT Exemption Removal: Section 10(50) of the Income Tax Act, which provided income tax exemption for transactions already subject to the Equalisation Levy, was withdrawn since the levy itself is scrapped.
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Safe Harbour for Offshore Funds: Amended Section 9A(3)(c) of the IT Act regarding eligible investment funds. The condition restricting domestic investment to 5% of the corpus removed the words 'or indirectly', freeing fund managers from tracking indirect resident participation.
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Search and Seizure Terminology: In block assessment rules for tax raids, the terminology was officially changed from assessing 'Total Income' to 'Total Undisclosed Income' to prevent ambiguity and double taxation on already declared income.
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Customs Duty Exemptions: Added 35 capital goods for electric vehicle (EV) battery manufacturing and 28 capital goods for mobile phone manufacturing to the customs duty exemption list to boost domestic production.
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Presumptive Taxation for Non-Residents: Relaxed provisions under Section 44DA and Section 115A of the IT Act for non-residents providing technical services or technology to set up electronics manufacturing facilities in India.

What Did NOT Change

The foundational structures of the New Tax Regime, which was comprehensively updated in the main budget presentation with zero tax liability up to an income of ₹12 lakh, remained completely unchanged despite some parliamentary opposition seeking standard deduction tweaks. Furthermore, while India aligned with OECD norms by dropping the Equalisation Levy, the bill did not unilaterally codify the OECD Pillar Two (15% Global Minimum Tax) into domestic law during this session.

Prelims Angle

NCERT Connection

This event directly applies the concepts taught in Class 11 Political Science (Indian Constitution at Work), Chapter 5: 'Legislature'. It highlights the exclusive financial powers of the Lok Sabha under Article 110 (Money Bills). The Finance Bill, which contains the government's taxation proposals, is introduced strictly as a Money Bill. Its passage with 35 government amendments demonstrates how the lower house exercises ultimate control over the public purse, while the Rajya Sabha can only delay the bill by 14 days or offer non-binding recommendations.

Common Misconceptions

✗ The government increased the Equalisation Levy to capture more revenue from tech giants like Google and Meta.

✓ The Finance Bill 2025 actually abolished the 6% Equalisation Levy entirely, effective April 1, 2025.

Because digital taxes are highly debated and governments globally are eager to tax Big Tech, people intuitively assume a 'Finance Bill amendment regarding digital tax' means higher taxation, missing the diplomatic context of US tariff threats.

✗ Both the 2% e-commerce tax and the 6% digital ad tax were abolished together in March 2025.

✓ The 2% levy on e-commerce transactions was already abolished earlier, taking effect on August 1, 2024. The March 2025 amendments specifically eliminated the older 6% levy on online advertising.

The Equalisation Levy existed in two distinct tranches (2016 and 2020). General media reports referring to the 'end of the digital tax' cause students to conflate two separate legislative repeals into one event.

Practice Questions

Q1

How Many Correct

Consider the following statements regarding the Finance Bill 2025 and digital taxation in India: 1. The 6% Equalisation Levy abolished in 2025 was originally introduced through the Finance Act of 2016. 2. The Finance Bill 2025 removes the words 'or indirectly' from Section 9A of the Income Tax Act to ease the safe harbour compliance for eligible offshore funds. 3. As a Money Bill under Article 110 of the Constitution, the Finance Bill requires the mandatory approval of the Rajya Sabha within 6 months. How many of the above statements are correct?

Q2

Match the Following

Match List I (Provision/Framework) with List II (Subject Matter): List I: A. Article 110 of the Constitution B. Section 163 of the Finance Act 2016 C. Section 9A of the Income Tax Act D. OECD BEPS Pillar Two List II: 1. Safe harbour regime for offshore investment funds 2. Introduction of the 6% Equalisation Levy 3. Global minimum corporate tax rate of 15% 4. Provisions strictly related to taxation, borrowing, or consolidated fund

Q3

Assertion & Reason

Assertion (A): The Government of India completely abolished the 6% Equalisation Levy on foreign digital companies via the Finance Bill 2025. Reason (R): India aimed to avoid retaliatory Section 301 trade tariffs from the United States and align its domestic tax policies with the OECD/G20 Inclusive Framework. Select the correct answer:

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