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Equalisation Levy

Updated on :  

08 min read.

Equalisation Levy was introduced in India in 2016, with the intention of taxing the digital transactions i.e. the income accruing to foreign e-commerce companies from India. It is aimed at taxing business to business transactions.

Background and Relevance of Equalisation Levy

Over the last decade, Information Technology has gone through an exponential expansion phase in India and globally. This has led to an increase in the supply and procurement of digital services.

Consequently, this has given rise to various new business models, where there is a heavy reliance on digital and telecommunication networks.
As a result, the new business models have come with a set of new tax challenges in terms of nexus, characterization, and valuation of data and user contribution.

The combination of inadequacy of physical presence based nexus rules in the existing tax treaties and the possibility of taxing such payments as royalty or fee for technical services creates a fertile ground for tax disputes.

To bring clarity in this regard, the government introduced vide Budget 2016, the equalisation levy to give effect to one of the recommendations of the BEPS (Base Erosion and Profit Shifting) Action Plan.

Applicability of Equalisation Levy

Equalisation Levy is a direct tax, which is withheld at the time of payment by the service recipient. The two conditions to be met to be liable to equalisation levy:

  • The payment should be made to a non-resident service provider;
  • The annual payment made to one service provider exceeds Rs. 1,00,000 in one financial year.

Services Covered Under Equalisation Levy

Currently, not all services are covered under the ambit of equalisation Levy. The following services covered:

  • Online advertisement
  • Any provision for digital advertising space or facilities/ service for the purpose of online advertisement

As and when any other services are notified will be included with the aforesaid services.

Rate of Tax Under Equalisation Levy

Currently, the applicable rate of tax is 6% of the gross consideration to be paid.
Example: Rohan has advertised on Facebook to expand his business. He has to pay Rs. 2,00,000 in FY 2020-21 to Facebook for the advertising services availed.
Solution: Facebook will bill Rohan for an amount of Rs. 2,12,765.9 
Rohan will deduct TDS at the rate of 6% of Rs. 2,12,765.9 = Rs. 12,765.9 and pay the balance of Rs. 2,00,000 ( Rs. 2,12,765.9 – Rs. 12,765.9) to Facebook.

Due Dates for Compliance

Due date of furnishing Equalisation Levy Statement (Form-1) is on or before 30th June of Financial Year ended (unless the date is extended).
For FY 2020-21, CBDT has extended the last date for furnishing the Equalisation Levy Statement (Form-1) to 31st December 2021.

From the above example, let us assume Rohan made the payment on 15th February 2021. He will have to deposit the tax with the authorities by 7th March 2021 and file the statement (i.e. Form -1) on or before 31st December 2021(extended due date).

Consequences of Delayed Payments

In case there is a delay in payment:

Interest is charged at 1% of the outstanding levy for every month or part thereof is delayed.

In case there is non-compliance on behalf of the service recipient:

The compliance procedure for the Equalisation Levy is the responsibility of the service recipient. 

1. Penalty for failure of payment

  • Equalisation Levy not deducted: Penalty equal to the amount of levy failed to be deducted (along with interest and depositing of the principal levy outstanding).
  • Equalisation Levy deducted but not deposited: Penalty equal to INR 1,000/day subject to the maximum of the levy failed to be deducted (along with interest and depositing of the principal levy outstanding).
  • Disallowance of such expenditure in the hands of the payer (unless the defect is rectified).

2. Penalty for failure of filing statement of compliance

  • INR 100/day for each day the non-compliance continues.

3. Prosecution

  • If a false statement has been filed then the person may be subjected to imprisonment of a term of up to 3 years and a fine.

Frequently Asked Questions

I am an individual and want to advertise online for personal purposes, do provisions of equalisation levy apply to me as well ?

No provision of equalisation levy are applicable if the payments are made for personal purpose.

I have advertised on Facebook to promote my business of baking. I have to pay Rs. 20,000 in FY 2019-20 to Facebook for the advertising services availed. Equalisation levy is applicable to me?

No, since during the financial year your annual payments did not exceed 1,000,00 you are not liable to deduct equalisation levy.

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