Equalisation Levy: Applicability, Rates, Due Dates & Penalties

The expansion of the information technology sector in India and around the world has also increased the need for digital services - both for communication and business growth. Today, most companies and businesses rely on online advertising services to spread their market reach. Similarly, the last decade has witnessed a rise of foreign e-commerce platforms in India, selling goods and services to residents in the country. However, tax laws have struggled to keep up with these digital transactions, resulting in tax revenue losses for the Indian Government. To rectify this, the Indian Government introduced the Equalisation Levy in 2016 to ensure a fair taxation system for such digital transactions.

Equalisation tax is a direct tax that’s applicable to the income accruing to foreign e-commerce companies from India. While not a part of the Income Tax Act , Equalisation Levy was introduced in Chapter VIII of the Finance Act of 2016. With the introduction of an Equalisation Levy, India’s 2016 Budget implemented the recommendations of the Base Erosion and Profit Shifting (BEPS) Action Plan.Often called the ‘Google Tax’, the Equalisation Levy section aims to tax business-to-business transactions. In fact, with the introduction of the Equalisation Levy section, the Indian Government can now tax the global advertising companies and also expand the list of specified services to ensure fairer taxation in the digital economy.While the Equalisation Levy section was originally introduced to tax foreign online advertising platforms offering services to residents in India, the provisions of the section have been amended in 2020. Also Read: Direct Tax And Indirect Tax: Difference, Types, Benefits

The Finance Act of 2020 widened the scope of the Equalisation Levy section which was originally introduced in 2016. According to the amended provisions of the Equalisation Levy section, EL would also be applicable on e-commerce supply or services offered by non-resident e-commerce operators. Starting 1st April 2020, a 2% Equalisation Levy is applicable on the amount of consideration either received or receivable by a non-resident e-commerce operator in exchange for the sales of goods and services to:

• Sale of advertisement that targets Indian customers or customers who view the advertisement via an Indian IP address
• Sale of data that’s collected from a person residing in India or from one who is using an IP address located in India.

1. An Indian resident
2. A non-resident in the following circumstances:
3. An individual who buys goods and services (or both) using an Indian IP address.

The amended section on Equalisation Levy also outlines the definition of an ‘e-commerce operator’. According to the stated guidelines, an e-commerce operator is a non-resident who owns, manages, or operates an electronic or digital platform/ facility for the sales of goods or services (or both) online.

After the 2020 amendment, the following specified services come under the scope of the Equalisation Levy section:

• Online advertisement
• Providing digital advertising space or any type of facility or service for the purpose of online advertisement
• Sales of goods and services on e-commerce platforms by non-resident operators to Indian customers

Note: The government reserves the right to notify other services and consequently expand this list.The applicability of the Equalisation Levy section depends on the following conditions:

• The payment is made to a non-resident service provider.
• The annual payment made to one non-resident service provider is more than Rs. 1 Lakh in one financial year.
• The annual gross receipts of a non-resident e-commerce operator from e-commerce services/supply is more than Rs. 2 Crores.

The above-mentioned factors need to be considered when determining Equalisation Levy applicability. It is also important to note that according to the 2020 amendment, the non-resident e-commerce operator bears the obligation of depositing the Equalisation Levy. This is a significant difference when compared to the EL applicable on online advertisements, where the payer must deposit the Equalisation Levy. Additionally, the Equalisation Levy must be deposited by the e-commerce operator with the Government on a quarterly basis and an annual statement must be filed within the stipulated due date.

The Finance Act of 2016 and its consequent amendments also highlight that the Equalisation Levy section is not applicable under certain specific conditions. No EL is applicable if:

• The non-resident service provider has a fixed permanent establishment (PE) in India and the requested e-commerce supply or service is linked to this PE.
• The annual turn-over of the e-commerce operator from e-commerce supply or services is less than Rs. 2 Crores during the previous financial year.
• The amount of consideration is less than Rs. 1 Lakh.
• The service provider is an Indian resident.
• The payment made to the non-resident for availing specified services is not for the purpose of business or work.

Additionally, to offer relief from double taxation, Section 10(50) of the Income Tax Act has also been amended. Sec 10(50) of the Income Tax Act now states that the income generated from specified services on which the Equalisation Levy is applicable shall be exempted from the calculation of total taxable income.

The type of service or transaction in question determines the rate applicable under the Equalisation Levy section. Here’s a break-down of the applicable EL rates:

• For specified services like online advertising, a 6% EL is applicable on the gross consideration.
• For e-commerce transactions like the sale of goods and services online, a 2% EL rate is applicable on the gross consideration.

Equalisation Levy: An Example

Let’s take an example to understand how the rates under the Equalisation Levy Section apply to real-world situations. Say, you wish to advertise your bakery business online using the online advertising services of a London-based company, XYZ Ltd. To do so, XYZ Ltd. charges an annual service fee of Rs. 4 Lakhs. An Equalisation Levy of 6% (Rs. 24,000) will be applicable on the same since XYZ Ltd. is a non-resident entity with no Indian PE offering online advertising services covered under Section 165 of the IT Act. So, XYZ Ltd. will bill you for a total of Rs. 4,24,000. You will have to deduct Rs. 24,000 as Equalisation Levy and remit the rest to the service provider. The deducted amount must be deposited with the Government before the applicable EL due date.

Equalisation Levy Return Due Dates

If you are availing of specified online services, the Equalisation Levy must be deposited with the Central Government on or before the 7th of the month following the month in which the EL was deducted. Thus, in the case of the example outlined above, you must deposit the EL by the 7th of September 2024, if you have made the payment on 12th of August 2024.E-commerce operators, on the other hand, need to deposit the Equalisation Levy to the Central Government on a quarterly basis, keeping the following deadlines in mind:

Moreover, as per the provisions of the Equalisation Levy section, every individual deducting EL must file an annual statement. The due date for furnishing the Equalisation Levy Statement via Form-1 is on or before 30th June of the financial year of deduction. Moreover, Form-1 should be duly signed and electronically verified using a digital signature or an electronic verification code.

The Equalisation Levy section also outlines the following penalties for non-compliance with its regulations:

• In case of delay in payment, an interest penalty of 1% is charged per month (or part of the month) on the outstanding EL until it is paid.
• In case the Equalisation Levy is not deducted within the prescribed due date, the penalty applicable is equal to the amount of the unpaid levy.
• In case the EL is deducted, but not deposited, a penalty interest of Rupees one thousand/day is applicable until the EL is deposited. However, the penalty in this case cannot exceed the total EL due.
• If the Equalisation Levy statement is not filed within the prescribed due date, a penalty of Rs. 100 per day is applicable for each day of non-compliance.
• If a false Equalisation Levy statement is filed, the individual may be subject to 3 years of imprisonment and a fine.

The Equalisation Levy section was introduced to help India address the challenges of taxing a digital economy. As such, the Equalisation Levy is an essential component of the taxation system pertaining to various specified digital services. With revisions being introduced into the Equalisation Levy section, businesses must remain up-to-date on amendments to avoid compliance hassles and penalties.Ready to make the most of your money? Start your tax planning journey now!