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.

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 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.

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 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.

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

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 2022-23 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

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

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 and file the statement (i.e. Form -1) on or before 31st July 2023.

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.

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 or 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 the Rs.1 lakh that was the threshold for the equalisation levy in 2016.