International Tax: OECD Pillar One and India's Digital Levy

A tax that vanished, and a treaty that never showed up

On 1 April 2025, a line item quietly disappeared from India's tax code. The 6% equalisation levy on online advertising — the "Google tax" that Indian marketers had been grossing up on Meta and Google invoices since 2016 — simply stopped applying. Its younger sibling, the 2% levy on non-resident e-commerce operators, had already gone on 1 August 2024. Neither exit came with much ceremony. Both were folded into Finance Bill amendments and moved on.

Between them, the two levies were India's answer to a problem that has bothered revenue authorities for a decade: how do you tax a company that sells to a hundred million of your citizens and owns nothing in your country you can put a hand on? India's answer was blunt and it worked. Tax the payment, not the profit. Make the Indian payer collect it. Sidestep the treaty question entirely by keeping the charge outside the Income-tax Act.

The numbers were not trivial. Equalisation levy collections ran to roughly ₹3,500 crore in FY 2023-24 and about ₹3,300 crore in FY 2024-25, with finance ministry officials estimating a revenue hit of over ₹3,000 crore in FY 2025-26 once the advertising levy was withdrawn.

So why give it up? Because India was not abandoning digital taxation. It was cashing a chip for something it expected to be worth more.

What Pillar One was supposed to deliver

Pillar One is the half of the OECD/G20 two-pillar package that deals with where profits get taxed, as opposed to Pillar Two, which deals with how little tax they can attract. Its centrepiece, Amount A, applies to multinational groups with global turnover above €20 billion and a profit margin above 10%. For those groups, 25% of the profit sitting above that 10% margin is reallocated to market jurisdictions, apportioned by where the revenue actually comes from. Nexus is triggered at €1 million of in-country revenue, dropping to €250,000 for smaller economies — a threshold designed so that low-income jurisdictions are not priced out of the deal.

Amount B is the less glamorous sibling: a standardised return for routine in-country marketing and distribution activity, intended to take a large class of everyday transfer pricing disputes off the table. It was folded into the OECD Transfer Pricing Guidelines and has been available for fiscal years starting on or after 1 January 2025.

The OECD's own impact assessment, published alongside the treaty text, put the prize at roughly USD 200 billion of profit reallocated to market jurisdictions each year, translating into an additional USD 17 to 32 billion of global tax revenue on 2021 data — with low- and middle-income countries gaining the most as a share of their existing corporate tax take. India, with a vast user base and comparatively little of the world's digital intellectual property, was firmly on the winning side of that ledger.

There was a condition attached, and it was the whole point. The Multilateral Convention that implements Amount A requires signatories to withdraw their digital services taxes and to hold off on introducing new ones. Unilateral gross-revenue taxes out; a coordinated slice of residual profit and binding dispute resolution in. India read the terms and started paying its side of the bill early.

"India did not lose its digital tax. It exchanged it — for a share of a treaty that has still not opened for signature."

The treaty that never signed

The text of the Multilateral Convention was released on 11 October 2023. A signing ceremony was pencilled in for the end of that year, then pushed to June 2024. Both dates came and went. A co-chairs' statement in January 2025 catalogued the issues still open, including the extent to which Amount B would be binding on treaty partners.

Then the politics changed. A US executive order of 20 January 2025 declared that the global tax deal had no effect domestically absent an act of Congress, and suspended American participation in the Amount A negotiations. A second order, on 21 February 2025, directed that foreign digital services taxes be examined as discriminatory measures. By May 2025, the head of the OECD's tax centre was telling the European Parliament that Pillar One would have to wait.

Pillar Two, notably, got an accommodation. The G7 side-by-side understanding of June 2025 was formalised by the Inclusive Framework in a detailed package released on 5 January 2026, effectively carving US-parented groups out of the income inclusion and undertaxed profits rules. Pillar One received no equivalent lifeline. In May 2026, OECD Secretary-General Mathias Cormann publicly conceded that the digital strand of the conversation remains the harder part of it.

Meanwhile, the unilateral measures Pillar One was meant to retire have not retired. Roughly half of European OECD countries have a digital services tax announced, proposed or in force, at rates ranging from 1.5% in Poland to 7.5% in Hungary, with Turkey trimming its rate to 5% from January 2026. The patchwork the treaty was designed to replace is, if anything, thicker than it was in 2023.

What India kept, and what it can actually collect

India did not walk away empty-handed. Significant Economic Presence, introduced in 2018 and given thresholds in 2021, survives. It has now been re-enacted as section 9(8)(d) of the Income-tax Act, 2025, which came into force on 1 April 2026, with Rule 13 of the draft Income Tax Rules, 2026 carrying over the familiar tests: aggregate payments above ₹2 crore, or systematic and continuous engagement with 300,000 or more Indian users. The Finance Act, 2025 carved out transactions confined to buying goods in India for export, aligning SEP with the older business connection rule.

On paper this is a broad claim. In practice it has a ceiling. SEP is a domestic nexus rule, and India's tax treaties still require a permanent establishment before business profits can be taxed at source. For a resident of a treaty partner — which covers most of the platforms anyone actually cares about — the treaty wins. SEP therefore bites hardest on non-treaty residents and on taxpayers unable to access treaty relief. That is a far narrower population than the equalisation levy reached, precisely because the levy sat outside the Income-tax Act and outside the treaty network by design.

The indirect side is untouched. Foreign suppliers of online information and database access or retrieval services continue to charge 18% GST on Indian consumption — streaming, cloud, software subscriptions, online gaming, digital advertising. India's digital tax base has not collapsed. What has become contingent is the direct-tax claim on residual profit.

The trade dimension nobody costed

In early February 2026, India and the United States signed a trade agreement under which Washington cut tariffs on Indian goods from 25% to 18%. The White House fact sheet that followed stated that India would remove its digital services taxes and negotiate bilateral digital trade rules, including a prohibition on customs duties on electronic transmissions. India's own statement on the agreement made no reference to removing any digital services tax.

Since the levies were already gone, the practical content of that commitment is forward-looking. It is a standstill, and it is now bilateral. Which changes the calculus considerably: even if Pillar One collapses outright, India's path back to a unilateral levy runs through a trade agreement rather than simply through a Finance Bill. That is a materially higher wall than the one New Delhi cleared in 2016 and again in 2020.

The other table

The OECD is no longer the only forum. The UN's Intergovernmental Negotiating Committee is drafting a Framework Convention on International Tax Cooperation, running from 2025 to 2027, with two early protocols. Protocol 1 covers precisely the ground India cares about: taxation of income from cross-border services in a digitalised and globalised economy. The co-leads published a draft protocol text on 20 July 2026, and the fifth negotiating session ran at UN headquarters in the first fortnight of August 2026. Final texts are due before the General Assembly in 2027.

For a country that has long argued for source-based taxation and backed the UN Model's Article 12B approach to automated digital services, this is the friendlier room. It is also the slower one. A framework convention and a protocol still need signature, ratification and bilateral treaty amendment before a rupee moves.

What it means on the ground

For non-resident platforms, the compliance win is real and immediate: no levy returns, no quarterly remittance, no gross-up conversation with Indian customers. But SEP exposure now needs a documented treaty position rather than a shrug, and the Income-tax Act, 2025 arrives with rules permitting officers to estimate non-resident income on a percentage or global-profit-ratio basis. Attribution disputes are the obvious growth area.

For Indian advertisers and marketplaces, a 6% surcharge has left the media budget — the levy was almost always passed down, given how concentrated the ad market is.

For the exchequer, more than ₹3,000 crore a year has been given up against a Pillar One share that cannot yet be quantified, because there is nothing to quantify it against. And the Union Budget 2026-27 leaned further in the same direction, proposing a tax holiday running to March 2047 for eligible foreign companies procuring services from Indian data centres. The signal is not subtle: attracting digital infrastructure currently outranks taxing digital revenue.

India played the negotiation straight. It did what the deal asked, roughly in the order the deal asked for it. Whether that reads as good faith or as a concession banked too early depends on what happens in New York and Paris over the next eighteen months. For now the levy is gone, the treaty is in transit, and India's claim on the profits of the world's largest digital businesses rests on a nexus rule that most of its tax treaties are drafted to override.

Sources

1. OECD — Multilateral Convention to Implement Amount A of Pillar One — https://www.oecd.org/en/topics/sub-issues/reallocation-of-taxing-rights-to-market-jurisdictions/multilateral-convention-to-implement-amount-a-of-pillar-one.html

2. OECD — Pillar One Update: Co-Chairs' Statement, Inclusive Framework on BEPS (January 2025) — https://www.oecd.org/content/dam/oecd/en/topics/policy-issues/beps/pillar-one-update-co-chair-statement-inclusive-framework-on-beps-january-2025.pdf

3. OECD — Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package (January 2026) — https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/global-minimum-tax/side-by-side-package.pdf

4. Income Tax Department, Government of India — Equalisation Levy — https://www.incometaxindia.gov.in/equalisation-levy3

5. Income Tax Department, Government of India — Section 9 (Income deemed to accrue or arise in India) — https://www.incometaxindia.gov.in/w/section-9-59

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21. Deccan Herald — Govt to abolish 'Google tax' amid Trump's tariff threat — https://www.deccanherald.com/business/govt-to-abolish-google-tax-amid-trumps-tariff-threat-3462385

22. Bruegel — Has the global minimum tax survived Trump? — https://www.bruegel.org/analysis/has-global-minimum-tax-survived-trump