Section 195 TDS vs Equalisation Levy — Foreign AI Vendor Payments Transition

Who this page is for

Three audiences:

1. Indian CFOs + tax heads reconciling FY 2024-25 + FY 2025-26 returns for foreign AI / SaaS / cloud vendor payments under the transition windows
2. Statutory auditors + ICAI practitioners evaluating client classifications under the post-Equalisation-Levy regime
3. Tax advisors assembling the historical reconciliation work + forward-going compliance framework

The short version: Equalisation Levy is fully abolished as of 1 April 2025 (both versions). Section 195 + GST RCM are the replacement regimes. FY 2024-25 and FY 2025-26 returns sit in transition windows with dual-regime treatment per payment date.

The side-by-side

Dimension	Equalisation Levy 2.0 (now abolished)	Section 195 TDS (post-EL replacement)
Status	Abolished 1 August 2024 by Finance Act (No. 2) 2024	Active — operative framework post-abolition
Rate	2% on gross consideration	Per Section 9 IT Act classification + DTAA; nil for end-user software (Engineering Analysis); 10-15% for royalty/FTS under typical DTAA; up to ~20.8% effective for non-treaty foreign companies
Who paid the liability	Indian payer paid the levy directly to the government on behalf of foreign vendor	Indian payer deducts TDS from payment to foreign vendor before remittance
Coverage	Non-resident e-commerce operators (broad scope covering most foreign SaaS / cloud / AI in many configurations)	Any non-resident payment chargeable to tax in India under Section 9
Threshold	Annual aggregate > ₹2 crore from Indian residents (per non-resident operator)	No threshold — TDS from first rupee where chargeable
Classification work required	Minimal — applied to “e-commerce supply or services” broadly	Substantial — per-vendor classification under Section 9 + DTAA + Engineering Analysis
DTAA interaction	EL 2.0 operated OUTSIDE DTAA framework; no treaty relief	Section 195 operates WITHIN DTAA framework; treaty-beneficial rate available per Section 90(2)
Engineering Analysis SC position	Did not apply; EL 2.0 was a separate statutory levy	Applies — standard end-user software licences NOT royalty under domestic law (March 2021 SC + May 2026 review dismissed)
Form compliance	EL Statement filed; no Form 15CA/15CB	Form 15CA Part C + Form 15CB required for aggregate remittances > ₹5L per payee per FY
CA professional certification	Not required for levy payment	Form 15CB = CA certificate required above threshold
Tax credit available to Indian payer	No — EL was a final levy	Yes — TDS deducted is creditable in computing income tax liability
GST RCM interaction	RCM applied separately (Section 5(3) IGST Act) — both were owed	RCM still applies separately — both Section 195 + IGST RCM may apply to same payment

Equalisation Levy 1.0 — the parallel transition for advertising

The same comparison applies to EL 1.0 (online advertising services) with a different cutoff date:

Dimension	EL 1.0 (now abolished)	Section 195 TDS post-EL-1.0
Status	Abolished 1 April 2025 by Finance Act 2025	Active post-abolition
Rate	6% on consideration where annual aggregate to single non-resident > ₹1 lakh	Per Section 9 + DTAA classification
Coverage	Online advertisement services from foreign vendors (Google Ads, Meta Ads, LinkedIn Ads, X / Twitter Ads, etc.)	Same vendors post 1 April 2025
Pre 1 April 2025 payments	6% EL applied	N/A
Post 1 April 2025 payments	N/A	Section 195 applies subject to Engineering Analysis + DTAA

For Indian companies with material online advertising spend (typical for SaaS exporters, e-commerce companies, fintechs, D2C brands), FY 2025-26 is the dual-regime year for advertising spend — same reconciliation discipline as FY 2024-25 was for SaaS / cloud / AI spend.

The transition windows — what FY each affects

FY	EL 2.0 (foreign e-commerce / SaaS / cloud / AI)	EL 1.0 (online advertising)	Dual-regime issue?
FY 2024-25	EL 2.0 applies 1 Apr - 31 Jul 2024 (4 months); abolished 1 Aug 2024	EL 1.0 applies full year	YES — for SaaS/cloud/AI payments
FY 2025-26	Section 195 applies full year	EL 1.0 applies 1 Apr - 31 Mar 2025 N/A — but EL 1.0 abolished 1 Apr 2025, so Section 195 applies full year	YES — for advertising payments (the transition happens at FY start, but reconciliation against pre-1 Apr 2025 records persists)
FY 2026-27	Section 195 full year	Section 195 full year	No — steady-state

The reconciliation discipline

For Indian payers with material foreign vendor spend, the FY 2024-25 + FY 2025-26 reconciliation work involves:

1. Bucket payments by date. Pre-cutoff (EL regime) vs post-cutoff (Section 195 regime). The cutoffs: 1 August 2024 for SaaS / cloud / AI; 1 April 2025 for online advertising.

2. For pre-cutoff payments: Verify EL was correctly paid + reported in the relevant EL Statement. Confirm Section 195 was NOT also deducted (would create double taxation).

3. For post-cutoff payments: Classify per Section 9 IT Act (royalty vs FTS vs business income); apply DTAA + Engineering Analysis; deduct TDS at determined rate (often nil for end-user software licences under domestic law).

4. Form 15CA/15CB compliance: For aggregate remittance > ₹5L per payee per FY, file Form 15CA Part C + obtain Form 15CB CA certificate. Coverage typically expands materially in post-EL period because more payments now fall under Section 195 framework.

5. Form 26AS reconciliation: Cross-check TDS deducted + paid against Form 26AS quarterly. Identify gaps where TDS was deducted but not deposited, or where Section 195 was over-deducted relative to Engineering Analysis position.

6. GST RCM separately: RCM under Section 5(3) IGST Act applies to imported services regardless of Section 195 treatment. Same payment can trigger both Section 195 TDS (income tax) and 18% IGST RCM (GST) — neither absorbs the other.

Common reconciliation findings

In BatchWise advisory work on this reconciliation:

• Over-paid EL 2.0 — entity continued paying 2% EL on post-1 Aug 2024 payments out of habit; refund claim possible within time limits
• Missed Section 195 classification — entity treated post-1 Aug 2024 payments as exempt from all income-tax-side levies; Section 195 classification was never done; audit risk on TDS non-deduction
• Over-deducted Section 195 — entity deducted TDS at flat 10% on all foreign software payments without applying Engineering Analysis position (which would yield nil for most end-user software). Refund claim possible.
• Form 15CA/15CB compliance gap — historical compliance was lighter under EL 2.0 (where EL applied, Section 195 generally didn’t, so Form 15CA/15CB was often simpler); post-transition coverage expansion creates retrospective filing obligation
• Missed RCM despite EL — entity paid EL 2.0 but missed 18% IGST RCM; both were owed in pre-1 Aug 2024 period

The clean state — FY 2026-27 onwards

FY 2026-27 is the first full year under the steady-state post-EL regime. No transition windows. Section 195 + Section 5(3) IGST RCM are the only operative regimes. The complexity shifts from transition reconciliation to steady-state classification work — per-vendor Section 9 + DTAA + Engineering Analysis classification at scale.

For Indian listed entities under the SEBI/MCA January 2026 AI disclosure mandate, FY 2026-27 statutory audit will explicitly test the Section 195 classification work on material foreign AI vendor payments. Establishing the classification framework + Form 15CA/15CB workflow before FY closes is the audit-readiness work that BatchWise AI’s AI Spend & Tax Optimisation engagement explicitly delivers.

Cross-references

• Section 195 TDS on foreign AI vendors — full statutory mechanics
• Equalisation Levy abolition — complete EL 1.0 + 2.0 history
• RCM on foreign SaaS — the parallel GST regime that runs independent of Section 195
• AI Spend & Tax Optimisation methodology — sub-domain 2 covers Section 195 + Form 15CA/15CB in operational depth