Equalisation Levy: Applicability, Due Date, Payment And Returns

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. It is also often referred to as the "Google Tax"

What Is Equalisation Levy Background and Relevance

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

To clarify this, the government introduced the equalisation levy in Budget 2016 to implement one of the recommendations of the BEPS (Base Erosion and Profit Shifting) Action Plan.

Equalisation Levy Applicability

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 are covered:

• Online Advertisement Services (Effective from June 1, 2016).
• Any provision for digital advertising space or facilities/services or selling goods to Indian residents, or users accessing services/goods through Indian IP addresses (Effective from April 1, 2020).

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

Equalisation Levy Exclusion

• The non-resident service provider has a permanent office in India, and the requested service is linked to that permanent office/establishment.
• The total consideration amount to be paid for the specific service payable or received is less than Rs.1 lakh.
• The service described is not intended to be used to pursue a profession or work.
• An exemption under section 10(50) of the Act is provided to avoid double taxation for any income arising from specified services provided on which equalisation levy is chargeable.
• An income chargeable to tax as fees or royalties for technical services will not be included as income for the equalisation levy purposes.

Rate of Tax Under Equalisation Levy

The tax rate under the equalisation levy depends on the type of service or transaction.

• For specified digital services, such as online advertising, the rate is 6% of the gross consideration.
• For e-commerce transactions, such as online sale of goods or services, the rate is 2% of the gross consideration. 

Example: Rohan has advertised on Facebook to expand his business. He has to pay Rs.2,00,000 in FY 2023-2024  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.

Equalisation Levy Due Dates for Compliance

The due date for furnishing Equalisation Levy Statement (Form-1) is on or before 30th June of Financial Year ended (unless the date is extended). 

In case of specified digital services: On or before 7th day of the month following the month in which equalisation levy was deducted.

From the above example, let us assume Rohan made the payment on 15th February 2023. He will have to deposit the tax with the authorities by 7th March 2023. In addition to the monthly remittances, Equalisation Levy Statement (Form-1) is to be furnished on or before 30th June from the end of the FY. For Example, for AY 2024-25, the due date is June 30th 2024.

In case of E-Commerce transactions: If an equalisation levy is applied to the delivery of products or services through e-commerce, the amount of the levy must be paid by the deadlines listed below

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:
  • Interest of 1% per month or part month during which such failure continues
  • 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.

Equalisation Levy Expansion

In 2020, the government announced the advanced version of the equalisation tax. Under this new equalisation tax, it is essential to include all online merchants who are not residents of India under tax directly. Equalisation levy is charged at the rate of 2% of the consideration receivable or received by an e-commerce operator for e-commerce services provided or supply made or facilitated by it:

• to a person resident in India, or
• to a non-resident in certain specified circumstances, which are as follows:
  • sale of advertisement, targeting a customer who is resident in India or a customer who accesses the advertisement through an Internet Protocol (IP) address located in India, and
  • sale of data collected from a person who is resident of India or from a person who uses an IP address located in India
• to a person who buys goods or services or both using an IP address located in India.

An E-commerce operator is a non-resident who operates, owns, or manages a digital or electronic facility or platform for the online provision of services, online sale of goods, or both.

The new equalisation levy is not applicable for transactions already covered under the old equalisation levy, i.e. in the Finance Act 2016. The new equalisation levy system does not apply to online advertising or the provision of digital space. The new equalisation levy applies to non-residents operating in the e-commerce sector who are residents of India and customers who have their Indian IP address.

The threshold for the equalisation levy is set at Rs.2 crores instead of Rs.1 lakh, which was the threshold in 2016 for online advertisement/ specified services.

Conclusion

The Equalisation Levy is a crucial part of India’s efforts to tax the digital economy effectively. While it broadens the tax base and ensures fair taxation of non-resident e-commerce operators, it also poses compliance challenges. Businesses must stay updated with the rules and ensure timely compliance to avoid penalties and interest.