The Equalisation Levy is a tax introduced by the Indian government to address the taxation challenges posed by the digital economy, particularly targeting income earned by foreign companies from India without a physical presence. It was first implemented in 2016 and has since been expanded.

Key Features of the Equalisation Levy:

• Purpose:

• • It aims to tax digital transactions, ensuring that foreign e-commerce and digital service providers contribute to India’s tax revenue, even if they lack a permanent establishment (PE) in India.
  • Often called the "Google Tax," it addresses the imbalance between domestic and foreign companies in the digital space.
• Scope:

• • Initial Phase (2016): Introduced via Chapter VIII of the Finance Act, 2016, it imposed a 6% levy on payments for online advertising services, digital advertising space, or related facilities provided by non-resident companies to Indian residents or non-residents with a PE in India. This applies only if the annual payment exceeds ₹1 lakh (approximately $1,200 USD).
  • Expanded Phase (2020): The Finance Act, 2020 broadened the levy to include e-commerce supply or services by non-resident e-commerce operators, effective from April 1, 2020. This carries a 2% tax on gross consideration received from:
    • Sales of goods or services to Indian residents or users with an Indian IP address.
    • Sales of advertisements targeting Indian customers.
    • Sales of data collected from Indian users.
    • The threshold for this is ₹2 crore (approximately $240,000 USD) in annual revenue from these activities.
• Applicability:
• • Applies to non-resident entities without a PE in India.
  • For the 6% levy, the payer (Indian resident or non-resident with a PE in India) deducts and deposits the tax.
  • For the 2% levy, the non-resident e-commerce operator is responsible for paying the tax directly.

The government states that both the Equalisation Levy and Significant Economic Presence (SEP) are in line with India’s commitment to the Base Erosion and Profit Shifting (BEPS) Action Plan formulated by the Organisation for Economic Co-operation and Development (OECD).

• As per the OECD’s official website, Base Erosion and Profit Shifting (BEPS) refers to tax strategies employed by multinational corporations to exploit gaps in tax regulations, shifting their profits to jurisdictions with little or no taxation, thereby reducing their tax liabilities.

• The OECD/G20 BEPS Project provides governments with frameworks and tools to curb tax avoidance, ensuring that corporate profits are taxed in the countries where the underlying economic activities occur and where value is actually generated.

• BEPS Action 1 addresses the significant challenges posed by the digital economy, aiming to develop a globally accepted solution. According to the OECD’s policy paper, an ‘Equalisation Levy’ is suggested as a potential approach to mitigate direct tax concerns arising from digital business models.

• In October 2021, India, the United States, and other members of the OECD/G20 Inclusive Framework reached an agreement to implement a two-pillar strategy to manage tax complexities linked to the expansion of the digital economy.

• The global tax deal’s two-pillar solution comprises:

  • Pillar One, which involves reallocating a portion of profits to the jurisdictions where businesses operate.

  • Pillar Two, which introduces a minimum tax and a subject-to-tax rule to ensure fair taxation.

What are the issues around delimitation?

For Preliminary Examination:   Current events of national and international importance

For Mains Examination: GS II - Polity & Governance

Context:

There has been a renewed debate about delimitation after the issue was raised by the Chief Minister of Tamil Nadu. The delimitation of constituencies for the Lok Sabha and State Legislative Assemblies is to be carried out on the basis of the first Census after 2026.

Read about: 

What is a Delimitation Commission?

Census Exercise

Key takeaways:

• Delimitation refers to the process of determining the number of seats and defining the boundaries of territorial constituencies in each state for both the Lok Sabha and Legislative Assemblies.
• This task is undertaken by the Delimitation Commission, which is established through an act of Parliament. Past delimitation exercises were conducted based on the Census figures of 1951, 1961, and 1971.
• The total number of Lok Sabha seats was fixed at 543 following the 1971 Census, when the population stood at 54.8 crores. Since then, this figure has remained unchanged to promote population control initiatives.
• However, a revision is scheduled to take place after the first Census conducted post-2026. With the 2021 Census delayed due to the COVID-19 pandemic, discussions have emerged linking it to the upcoming delimitation process.

Key Issues in Delimitation

Over the past five decades, India's population growth has been uneven across states. Northern states such as Uttar Pradesh, Bihar, Madhya Pradesh, and Rajasthan have experienced significantly higher growth rates compared to southern states like Kerala, Tamil Nadu, Karnataka, and Andhra Pradesh. Two possible approaches to delimitation are being considered:

1. Retaining the current number of 543 seats while redistributing them among states.
2. Expanding the Lok Sabha to 848 seats, proportionally increasing representation across states.

Union Home Minister Amit Shah recently assured that no state would lose its existing seat share and that any increase would be implemented on a pro-rata basis. However, the criteria for this proportional allocation—whether based on the current seat distribution or projected population—is unclear.

If future seat allocation follows projected population figures, southern states, along with smaller northern states like Punjab, Himachal Pradesh, and Uttarakhand, as well as northeastern states, may receive fewer seats compared to larger northern states. This could potentially disrupt the federal balance, diminishing political influence for regions that have successfully controlled their population. Currently, southern states hold a 24% share of Lok Sabha seats, which could drop by 5% under such a system.

Possible Solutions

• Democracy is based on the principle of one citizen, one vote, one value. However, this principle has already been adjusted since 1976, when delimitation was first postponed to encourage population control.
• In contrast, the United States has maintained a fixed number of 435 seats in its House of Representatives since 1913, despite its population nearly quadrupling from 9.4 crores in 1911 to an estimated 34 crores in 2024.
• The primary role of a Member of Parliament (MP) is to legislate on matters in the Union List and oversee the functioning of the Union Government, while most central schemes are executed by state administrations.
• Despite India's population rising from 55 crores to 145 crores over the past five decades, the Lok Sabha has functioned effectively with 543 MPs. With the country’s population expected to peak at 165-170 crores in the next three decades before gradually declining, maintaining the current number of Lok Sabha seats could be a viable option. This would preserve existing state-wise representation and uphold the federal structure.
• To safeguard regional political interests, MPs and political leaders from southern states, smaller northern states, and the northeastern region should advocate for capping Lok Sabha seats at 543. Meanwhile, to ensure adequate local representation, state assemblies could increase the number of MLAs in proportion to projected population growth