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-residents 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.

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What are the specified services?

1. Online Advertisement and Digital Marketing Services - It includes payments made to foreign companies for running online advertisements on digital platforms like search engines, video streaming sites, websites, and social media networks. It also covers services like sponsored content, PPC campaigns, display ads, and influencer marketing handled by non-resident entities.
2. Provide digital advertising space and intermediary services: It includes fees paid for obtaining advertising space on digital platforms, including banner ads, pop-ups, and promotional placements. It also covers the services offered by intermediaries such as marketplaces and ad networks that facilitate ad placements for businesses operating in India.

When the annual payment exceeds Rs. 1,00,000, equalisation tax is levied on the specified services.

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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 the Finance Act 2016.

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What is the applicability of Equalisation Levy?

• Non-resident Service Providers - The levy focuses on non-resident entities for specified services.
• Business-to-business Transactions - It is aimed at business-to-business transactions, wherein an Indian resident or a non-resident with a permanent establishment in India receives services.

This levy is not applicable when -

• The non-resident providing services in India has a permanent establishment in India, as their income becomes taxable under the existing income tax laws.
• The payment for specified services does not exceed Rs.1 lakh in a year.

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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, a penalty equal to ₹ 1000/per day would be charged till the default continues and an interest of 1% per month or part thereof. However, the penalty under this clause shall not exceed the amount of equalisation levy that he failed to pay.
• Rs.100 per day till the non-compliance continues.

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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

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