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Equalisation Levy: A Comprehensive Overview

Updated: May 29


Equalisation Levy: A Comprehensive Overview

When the Finance Act of 2016 first introduced the Equalisation Levy, it was aimed at online ad providers. Its purview has grown over time to encompass e-commerce services and supplies. An extensive explanation of the Equalisation Levy, its effects, and the standards guiding its implementation are given in this article. 

 

Table of Contents

 

What is the Equalisation Levy?

A direct tax called the Equalisation Levy is applied to online purchases made to non-residents and to money that non-residents receive in exchange for particular services. This tax was introduced in Chapter VIII of the Finance Act of 2016 and is not included in the Income Tax Act of India.


The field of information technology has experienced exponential growth in the past ten years. The supply and acquisition of digital services have increased as a result of this. As a result, there are now a number of innovative business models that heavily rely on digital and communications networks. As a result, there are now additional tax problems related to the nexus, classification, and valuation of data and user contributions that come with the new business models. To provide clarification, the government implemented the equalisation levy in Budget 2016, implementing one of the proposals from the BEPS (Base Erosion and Profit Shifting) Action Plan.


Applicability of Equalisation Levy

The Equalisation Levy is a type of direct tax that is deducted by the service provider at the moment of payment. There are two requirements to fulfil to be subject to an equalisation levy: 

  • The annual payment to a single service provider is above Rs. 1,00,000 in a single financial year.

  • It must be paid to a non-resident service provider.

The services covered under the Equalization Levy include:

  • Online advertisement

  • Provide any additional facility, such as digital advertising space, for the purpose of online advertising

  • Any additional services that the Central Government may notify you of in this regard.


Tax Rate Under Equalisation Levy

The kind of service or transaction determines the tax rate under the equalisation levy. The fee is 6% of the gross consideration for certain digital services, like online advertising. The rate is two percent of the gross consideration in e-commerce transactions, such as online sales of products and services. The equalisation levy seeks to prevent double taxation and guarantee a fair share of taxes in the digital economy. For instance, an equalisation charge of Rs. 20,000 (2% of Rs. 10 lahks) would be imposed on a non-resident e-commerce operator selling items to Indian people for Rs. 10 lahks. As a further illustration, suppose a non-resident firm charges an Indian resident Rs. 5 lakh for online advertising services. In that case, an equalisation fee of Rs. 30,000 (6% of Rs. 5 lakh) would be levied.


Equalisation Levy Exclusion

  • The requested service is connected to the non-resident service provider's permanent office/establishment in India. 

  • Less than Rs. 1 lakh is the whole consideration that must be given for the particular service that is due or received.

  • The service being described is not meant to be utilised for employment or professional pursuits. 

  • To prevent double taxation, section 10(50) of the Act offers an exemption for any income derived from certain services that are subject to an equalisation levy. 

  • For the purposes of the equalisation levy, revenue that is subject to taxation as fees or royalties for technical services is not considered income.


Equalisation Levy Due Dates

The amount withheld as an equalisation levy must be credited to the Central Government's account by the seventh day of the month that follows the month from which the levy was withheld, at the latest. On the other hand, if an equalisation levy is applied to the delivery of products or services through e-commerce, the amount of the levy must be paid to the Central Government's credit by the deadlines listed below. 


Equalisation Levy Due Dates

Consequences of Non-Deduction of Equalisation Levy

If the assessee neglects to deduct the levy, they will be responsible for making the payment. Furthermore, the amount paid for such services will be disallowed under Section 40(a) if an assessee fails to deduct the equalisation levy or, after deduction, fails to deposit the same on or before the deadline for providing a report of income (ib). However, the aforementioned consideration will be recognised as a deduction in calculating the income of the prior year in which the equalisation levy was paid if it is deducted and submitted in the following year. An assessee will be required to pay a penalty equal to the amount of the levy that they failed to deduct if they fail to deduct the equalisation charge, in whole or in part.


Consequences of Late Deposit of Equalisation Levy

  • Interest will be assessed at the rate of 1% every month or portion of the month on the amount that remains overdue if the taxpayer neglects to deduct or deposit the equalisation levy by the deadline. 

  • The taxpayer will additionally be responsible for paying a penalty equivalent to the amount of the unpaid levy if they neglect to deduct the equalisation levy by the deadline. 

  • A person may face up to three years in prison and a fine if they make a false statement in any verification conducted under this Chapter or any rules imposed under it.

  • A penalty of ₹ 1000 per day will be imposed if the Equalisation Levy is deducted but not deposited, but the penalty under this section cannot be greater than the amount of the Equalisation Levy that the defaulting party failed to pay.


Statement of Equalisation Levy

A statement of equalisation levy in Form 1 must be prepared, delivered, or caused to be delivered by any assessee or e-commerce operator who has deducted the equalisation levy. The Assessing Officer or any other authority or agency designated by the Board in this regard must receive this statement. The following methods can be used to provide such a form: (

(a) electronically with a digital signature; or 

(b) electronically with an electronic verification code (EVC). 

On or before June 30 of the fiscal year that follows the financial year in which the equalisation levy is charged, a statement of equalisation levy must be provided.


Expansion of Equalisation Levy

The advanced equalisation tax was announced by the government in 2020. It is crucial to directly charge all internet retailers who do not reside in India under this new equalisation tax. Equalisation levies are assessed at a rate of 2% of the money that an online retailer is entitled to receive for goods or services that they make, produce, or deliver.

  • To an individual who resides in India, or 

  • To a non-resident under specific circumstances: These scenarios include the following: the sale of advertisements targeted at either an Indian resident or a customer accessing the advertisement through an Indian IP address

  • The sale of data collected from an Indian resident 

  • A user of an Indian IP address to an Indian resident who purchases goods or services, or both, using an Indian IP address

Transactions protected by the Finance Act of 2016 or under the previous equalisation charge are not subject to the new equalisation levy. Digital space and online advertising are exempt from the new equalisation levy regime. Customers with an Indian IP address and non-residents working in the e-commerce industry who are Indian residents are subject to the new equalisation levy. Rather than the Rs. 1 lakh threshold that it was set at in 2016, the equalisation levy threshold has been raised to Rs. 2 crores.


Conclusion

In India, the Equalisation Levy is a key component of the online advertising and e-commerce tax system. It is imperative that professionals and organisations comprehend its intricacies, exclusions, and compliance obligations. Keep yourself informed and abide by Equalisation Levy rules to guarantee smooth operations and stay out of trouble.


FAQ

Q1. What is the Equalisation Levy, and who does it apply to?

Equalisation Levy is a tax imposed on specified digital services provided by non-resident companies to Indian residents or businesses. It applies to transactions involving online advertising, digital platforms, or related services.


Q2. When was the Equalisation levy introduced in India? 

First introduced on June 1, 2016, Chapter VIII of the Finance Act 2016 established the Equalisation Levy (EL).


Q3. What is the equalization levy for e-commerce?

A 2% equalisation charge shall be applied to the amount of consideration that the online retailer receives or is entitled to receive in connection with the supply of goods or services.


Q4. How is the Equalisation Levy different from other forms of taxation?

Unlike traditional taxes based on income or profits, Equalisation Levy is levied on specified digital services, regardless of whether the non-resident company has a permanent establishment in India. It aims to ensure fair taxation of digital transactions and address challenges in taxing the digital economy.


Q5. What is the Section 172 Equalisation levy?

An assessee or e-commerce operator who neglects to provide the statement within the stipulated time frame under section 167 sub-section (1) or sub-section (3) faces a penalty of one hundred rupees for each day the failure persists.


Q6. Is the equalisation levy still applicable?

The Indian government has expanded the equalisation levy's application as of April 1, 2020. A new provision known as Section 165A of the Finance Act of 2020 requires non-resident e-commerce companies that offer e-commerce products or services to Indian nationals to submit an equalisation fee.


Q7. Why was the equalisation levy introduced?

Many businesses that offer online services register in a nation with low tax rates and pay extremely cheap taxes on their worldwide revenue. Since Google's revenue in India was 4,108 crores in FY 2014–15, the government would get a significant windfall from the introduction of the Equalisation charge, which is why many have dubbed it the "Google Tax." because Google receives a hefty portion of the money spent on web ads.


Q8. What types of transactions are subject to the Equalisation Levy?

Equalisation Levy typically applies to payments made for online advertising services, including display advertisements, sponsored content, and other promotional activities on digital platforms. It may also cover revenues generated from digital intermediary services.


Q9. Are there any exemptions or thresholds for Equalisation Levy?

Generally, Equalisation Levy is applicable on specified transactions above a prescribed threshold. However, certain transactions or entities may be exempted based on provisions outlined in the relevant tax regulations or bilateral agreements.


Q10. How is Equalisation Levy calculated and paid?

Equalisation Levy is usually calculated as a percentage of the consideration paid for specified services. The levy amount is withheld by the payer at the time of making payments to non-resident service providers and deposited with the Indian tax authorities within the specified timeframe.



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