Trump's Tariffs and the Politics of India's Withdrawal of Digital Service Taxes

Amber Sinha is a contributing editor at Tech Policy Press.

Donald Trump’s impromptu tariff threats continue to complicate and reshape international trade policy and increasingly technology policymaking. The latest threats were issued last week when Trump warned countries imposing digital taxes on American tech companies that they would face additional tariffs on their exports to the United States unless those measures were withdrawn.

In India, the Modi government had anticipated pushback from the Trump administration, and in response to years of criticism by the office of the US Trade Representative, moved to withdraw the equalization levy in April this year. The years of trade conflict over the equalization levy, often referred to as the Google Tax, and India’s eventual capitulation represent a case study in inadequate international taxation rules and ad-hoc levies that developing countries pursue as sources of revenue against tech oligopolies, as well as the limited bargaining power these countries hold when negotiating with a maximalist Trump administration.

What is the equalization levy?

India first introduced a 6% equalization levy (levy) in 2016 on online advertising services provided by foreign companies, popularly known as the “Google tax.” Since the tax was collected from Indian service recipients, no treaty relief was available, effectively raising the cost of such services. In 2020, the regime was expanded with the introduction of a 2% levy on non-resident e-commerce operators for supplies or services provided or facilitated online.

In a separate but related policy, India introduced the Significant Economic Presence (SEP) rule in 2018, creating a taxable nexus for foreign entities if their annual revenues from India exceeded ₹20 million or if they engaged with at least 300,000 Indian users. Although designed for the digital economy, the broad wording meant it could apply to traditional businesses. These measures were India’s response to taxation challenges arising from the limitations of physical presence-based nexus rules and the ease with which digital services could circumvent such thresholds.

In 2020, the US Trade Representative (USTR) launched a Section 301 investigation into India's Digital Services Tax (DST), concluding that it unfairly targeted US companies. The USTR argued that the tax was discriminatory because it applied to foreign digital service providers while exempting Indian firms. In response, the USTR proposed a 25% tariff on certain Indian goods in 2021. However, these tariffs were paused for 180 days to allow for multilateral negotiations through the OECD and G20. Later that year, India and the US reached a compromise on the DST. This led the US to terminate the Section 301 action and remove the suspended tariffs.

In the Union Budget 2024, Finance Minister Nirmala Sitharaman withdrew the 2% levy for online transactions from August 1, 2024, citing its ambiguous scope and the compliance burden it created. In 2025, India further addressed US concerns by eliminating its 6% tax on digital advertising for companies like Google and Meta.

How do non-US countries tax Big Tech?

After the 2008 financial crisis, many governments faced mounting fiscal pressures, exposing significant gaps in international taxation—particularly in relation to digital services. Responding to a G20 mandate, the OECD launched the Base Erosion and Profit Shifting (BEPS) Project and, in 2013, introduced Action Plan 1. This initiative was part of the OECD’s broader package of 15 Actions aimed at curbing tax avoidance. The measures sought to limit excessive interest deductions, prevent the artificial avoidance of permanent establishments, and improve the exchange of tax information across borders.

By 2015, progress had been made on nearly all the OECD’s actions, with the exception of Action 1, which dealt with the taxation of the digital economy. Consensus on this issue proved elusive, and as Big Tech expanded its global footprint, frustration grew among governments. In the absence of a coordinated solution, many countries—both developed and developing —introduced their own unilateral measures. The most common of these were digital services taxes (DSTs), imposed on the gross revenues of online services such as digital advertising, e-commerce platforms, and streaming subscriptions. The United States strongly opposed these measures, threatening retaliatory trade sanctions under its Special 301 mechanism. The threat was temporarily suspended until the finalization of OECD’s Two-Pillar Solution, but the underlying message was clear: if countries rejected the framework and continued with unilateral measures, the threat would be reinstated.

For developing countries, digital taxation emerged as an important policy tool. Nations such as India and Nigeria introduced measures like the equalization levy to capture revenue from cross-border digital activity. Yet, under the OECD’s October 2021 agreement, countries adopting Pillar One are required to join a Multilateral Convention (MLC) that obliges them to dismantle such unilateral taxes. The obligation extends beyond the limited set of large companies covered by Pillar One and would force governments to forgo a broader and often more dependable source of revenue.

Despite these tensions, the adoption of digital services taxes continues to expand. Fifteen OECD members—including France, Italy, Spain, and the UK—have either adopted or proposed such taxes, alongside several non-OECD countries like India, Brazil, and Argentina. This trend reflects the widespread frustration with the absence of a binding global framework to fairly tax the digital economy. While unilateral measures like the equalization levy have been criticized as discriminatory, they must also be understood in the broader context: the failure of international taxation and nexus-based rules to keep pace with the digital economy, and the limited options available to Majority World countries to tax digital services that have a significant presence in their economies.

Trump’s tariffs and pressures to deregulate

In a piece reviewing the first 100 days of Trump 2.0, I highlighted how it was normalizing digital policymaking and regulation as a tool of negotiation between countries, based on allegiance to strategic interests rather than values. The example of US tariff threats prompting India (and, similarly, Canada) to withdraw digital taxes illustrates the lack of bargaining power available to most countries. To date, these concessions have not enabled either country to avoid prohibitive tariffs or the continuing threat of such measures.

One could argue that the withdrawal of the 6% equalization levy was reflective of a longer dialogue with the USTR over the last five years, rather than a direct response to the tariff threats of the Trump administration. However, the government’s sudden capitulation this year and the forfeiture of roughly USD 400 million in revenue suggest otherwise.

India has relied on a deepening relationship with the US built on cultural connections (through Indian students and a successful diaspora), the expanding role of American companies in India’s digital and financial economy, and mutual strategic and geopolitical interests in countering China. Yet none of these translate into concrete interests that yield immediate or populist returns, and it is increasingly clear that they hold little weight with the current Trump administration.