India's 'Google tax' move is a sneak peek into April 2 tariffs

By Andy Mukherjee

The world is living in fear of Donald Trump’s “Liberation Day.” In India, which keeps getting pilloried by the US president as an exemplar of bad behavior in trade, the reciprocal tariff announcement of April 2 has acquired a fervent overtone. In preparation, New Delhi is offering one sacrifice after another, hoping that the angry god of the White House will let it go with nothing more serious than a slap on the wrist.

The latest peace offering is the decision to do away with a 6 per cent tax on ads that local businesses place with foreign search engines, social media and e-commerce firms. This is Prime Minister Narendra Modi’s way of telling Trump, “Look, we aren’t China. Not only do we allow Alphabet Inc. and Meta Platforms Inc. to hog our digital-advertising pie, if you want us to make it cheaper for them to operate, that’s fine, too.”

The sacrifice is a win for Trump, though it isn’t much of a loss for Modi. Known colloquially as the “Google Tax,” the levy was a bad idea when it was introduced in India’s 2016 budget. Since then, domestic advertisers have had to withhold 6 cents on the dollar when they get their bills from places like Ireland, where online platforms typically book their revenue.

Just like Trump’s tariffs will be mostly paid by American consumers, the burden of the so-called Indian equalization levy had to be absorbed not by the tech platforms, but by the advertisers. It pushed up costs for local businesses. Where would they advertise, if not on Google or Facebook? As I had written in 2016, India was opening a Pandora’s box of unnecessary confrontation.

Big tech’s refusal to pay its fair share of taxes was — and continues to be — a global challenge. The OECD framework on base erosion and profit shifting had urged countries to avoid working at cross purposes and making the problem worse. That’s exactly what happened. Other countries, such as the UK and France, copied the move. The levy became a convenient device for New Delhi to mop up about $500 million annually. In fact, the first, small drop in collection occurred only six years later, a sign that the advertisers were resigned to the extra cost.

India’s high-profile tax disputes with Vodafone Group Plc and Cairn Energy Plc have given it a bad rep globally. However, those were British companies, whereas digital services are mostly offered by American platforms. Still, diplomats in Washington failed to move the needle. In 2020, India flatly told the first Trump administration that its digital services charge was not aimed at any particular country and the decision would not be reconsidered. That year, New Delhi introduced a further 2% levy on Indian purchases from foreign e-commerce sites. (It was finally dropped in 2024, though the tax on advertising stayed.)

All of a sudden, old hubris has been replaced by a new spirit of sacrifice. The question is whether this U-turn will prompt the US to sink its teeth still deeper into its trading partner’s policies, including the elaborate system it has for charging domestic spending on goods and services.

India’s consumption taxes are a value-added tax, or VAT. They go as high as 28 per cent. The finance minister said this month that authorities are “very close” to making some critical decisions on rate reductions. “While there was nothing to suggest this was triggered by US-India trade negotiations, one of the non-tariff barriers Mr. Trump has talked of is countries charging VAT,” Nomura Holdings Inc. wrote in a recent report.

This can’t be a quick concession, though. New Delhi will have to get India’s 28 states on board before it can offer a retooling of its consumption taxes in a bilateral trade agreement with the US. Although Trump has promised to be “lenient” to all countries, he has also slapped a surprise 25 per cent duty on auto imports. The focus of India’s diplomacy is to avoid being singled out for similar harsh treatment on April 2. Hence, the abolition of the “Google Tax.”

The desperation is showing. First came the red carpet for Elon Musk. Trump’s head of government efficiency has a choice. He could either bring in Tesla cars from Germany if he gets a big concession on the current 110% effective import duty. Or, he could get contract manufacturers to assemble them locally. Then there is SpaceX’s satellite broadband. Starlink doesn’t yet have regulatory approvals, but when it does, it will have a market: India’s two largest wireless carriers have, in recent days, gone from being Musk’s bitter rivals to his chosen partners.

The destination is clear for Washington. By its actions this week, or in negotiations later, the Trump administration will push India to slash its trade-weighted average tariff to American levels of 2.2 per cent, from 12 per cent. India will negotiate for higher limits, particularly to protect its economically vulnerable but politically powerful farmers. A reprieve on agriculture might mean concessions on other taxes.

The bond market might fret any serious loss of government revenue, though equity investors won’t mind more money in the hands of a struggling middle class. If the much-needed overhaul of India’s high consumption taxes finally takes place to please an angry deity in the White House, then so be it. Nor would businesses complain: No advertiser wants to set aside 6 cents for the government, when it can — in a slowing economy — spend the full dollar with Google.