The taxation of the digital economy in India presents multifaceted challenges rooted in the globalized and intangible nature of digital transactions. The primary challenge lies in determining taxable presence or Permanent Establishment (PE) of digital companies operating remotely in India. Current PE rules, designed for physical presence, often fail to capture significant economic activities conducted digitally. This complicates profit attribution, as digital business models heavily rely on intangible assets like algorithms and user data, making it difficult to allocate profits across jurisdictions accurately. Furthermore, aggressive tax planning strategies, such as transfer pricing and IP shifting to low-tax jurisdictions, contribute to base erosion and profit shifting (BEPS), undermining India's tax base. Data localization requirements further complicate tax implications by mandating local storage of user data, influencing how digital companies structure operations and comply with tax laws. India's introduction of an Equalization Levy (EL) on specified digital services aims to address these challenges but has raised concerns regarding compliance costs and international tax norms alignment. To navigate these challenges effectively, India should update its tax rules to include digital-specific provisions, such as significant economic presence (SEP) criteria aligned with global standards. Multilateral cooperation through forums like the OECD can harmonize digital taxation rules globally, reducing tax disputes and enhancing compliance. Leveraging data analytics and digital tools can improve tax administration capabilities, enabling better monitoring of digital transactions and enforcement of tax laws. Simplifying compliance procedures and providing clear guidelines can mitigate ambiguity and reduce compliance costs for digital firms. Additionally, fostering an environment that supports digital innovation through targeted tax incentives and R&D credits can stimulate economic growth while ensuring fair taxation.