What Is the Equalisation Levy under Finance Act 2016?

What is Equalisation Levy?

Equalisation Levy is a direct tax levied on online transactions made to non-resident or consideration received by a non-resident for specific services. This tax is not a part of the Income tax act of India but was introduced in Chapter VIII of the Finance Act 2016.

What are the specified services?

1. Online Advertisement
2. Provide digital advertising space or any other facility for the purpose of online advertisement.
3. any other service as may be notified by the Central Government in this behalf.

What is the background and relevance of Equalisation Levy?

The IT sector has explosively expanded over the last decade, and the supply and demand for digital services have increased.

IT growth and expansion led to new business models depending on digital communication networks.

New business models were facing tax challenges in terms of the characterization of data and protection and needed a new Tax system. Keeping that in mind, the finance ministry of India introduced equalisation levy in the Budget 2016 under Finance Act 2016.

What is the applicability of Equalisation Levy?

Equalisation Levy is a direct tax imposed by the Indian government on digital transactions involving non-residens. The applicability of Equalisation Levy depends on the following factors:

• Equalisation levy applies only to specified services such as online advertising, digital platforms, and e-commerce.
• The amount of consideration received by the non-resident exceeds ₹ 1 lakh in a financial year.
• If the recipient is a resident of India or has a permanent establishment in India.

When Equalisation Levy is not applicable?

• When the non-resident service provider including E Commerce operator has a permanent establishment in India, and the digital services are effectively connected with the permanent establishment.
• when the Annual turnover of the e-commerce operator from the e-commerce supply or services is less than rupees 2 crores during the previous year.
• When the digital service is not covered under the provision given under equalisation levy section 165 of the Finance Act 2016

What are the Consequences of Delayed Payments?

• If the taxpayer fails to deduct or deposit the equalisation levy within the due date, interest would be charged at the rate of 1% per month/ part of the month on the unpaid amount.
• If the taxpayer fails to deduct the equalisation levy within the due date, he/she shall also be liable to pay the penalty equal to the amount of unpaid levy.
• If a person makes a false statement in any verification under this Chapter or any rule made thereunder, he shall be punishable with imprisonment for a term which may extend to three years and with fine.
• If Equalisation Levy is deducted but not deposited, penalty equal to ₹ 1000/per day would be charged till the default continues However penalty under this clause shall not exceed the amount of equalisation levy that he failed to pay.

Rate of Equalisation levy tax

The tax rate under 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. The equalisation levy aims to ensure a fair share of digital economy tax and avoid double taxation.

For example, if a non-resident e-commerce operator sells goods worth ₹ 10 lakh to residents in India, an equalisation levy of ₹ 20,000 (2% of ₹ 10 lakh) would be levied on the operator.

Another example is if a non-resident entity provides online advertising services worth ₹ 5 lakh to an Indian resident, an equalisation levy of ₹ 30,000 (6% of ₹ 5 lakh) would be levied on the service provider.

Due Dates for Compliance