Equalisation Levy: A New Digital Tax Regime

Equalisation Levy or commonly referred to as ‘Google tax’ was brought in the year 2016 by the then Finance Minister Late Sh. Arun Jaitley as part of implementation of OECD (Organization for Economic Cooperation and Development) Action Plan on taxation of digital transactions (BEPS Action Plan-1). It was observed that business these days is conducted without regard to physical location and national boundaries which has created new tax challenges. OECD is an international organization working on building range of policies, standards and finding solutions for improving economic performance, fighting international tax evasion and so on. It is a consortium of 36 countries working together to shape global policies and finding solutions to a range of social, economic and environmental challenges. Globally nations felt that companies operating worldwide through digital mode such as Google, Facebook, etc. have significant economic presence in multiple nations but end up paying minimal taxes and therefore, concept of ‘Taxing the Digital Economy’ was introduced.

Provisions brought in the year 2016:

• Equalisation Levy was introduced as a special chapter in Finance Act 2016 instead of separate Act i.e., Chapter VIII of the Finance Act 2016 (Section 163 to Section 180).
• It is levied on amount of consideration for any specified service received/ receivable by a non-resident from
• A person resident in India and carrying on business or profession; or
• Any non-resident having permanent establishment in India.
• Specified service has been defined in section 164 of the Act and “means online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf.
• Rate of Equalisation levy is 6%
• Income leviable to Equalisation levy is exempt from tax under Income Tax Act.
• Equalisation Levy is not leviable in following cases:
  • Non-resident providing such service has permanent establishment in India and such service is connected with permanent establishment.
  • The aggregate amount of consideration does not exceed Rs. 1 Lakh.
  • Purpose of payment is not for carrying on business or profession.
• Person making payment to non-resident needs to deduct equalisation levy from amount paid/payable and deposit to Central Government by 7^th of next month. (Section 166)
• Annual Statement of Specified Services in Form 1 to be submitted by 30^th June of the following year (For example, 30^th June 2020 for FY 19-20 transactions).
• Revised Statement can be filed upto 2 years from the end of financial year in which specified service is provided.
• Interest payable at the rate of 1% for every month or part of the month for delayed payment.
• 100% penalty if failed to deduct equalisation levy.
• Penalty of Rs. 1000 per day or amount of equalisation levy (whichever is lower), if levy deducted but failed to deposit with government.
• Penalty of 100 for each day for failure to furnish Annual Statement (Form-1)
• Amount of equalisation levy if not deducted or not paid on or before due date of filing income tax return will be disallowed if under section 40(a)(ia) of Income Tax Act.
• Appeal to CIT (Appeals) possible against Penalty Order within 30 days of receipt of order in Form-3. Fee for filing Appeal is Rs. 1,000.
• Similarly, appeal to ITAT against order of CIT (Appeals) can be made by both assessee as well as Commissioner within 60 days of date of receipt in Form-04.
• Punishment for false statement: Upto 3 years imprisonment (Non-bailable) and fine.
• No prosecution can be started without approval of Chief-CIT.
• Provisions of Section 120, 131, 133A, 138, 159 to 181, 220 to 227, 229, 232, 260A, 261, 262, 265 to 269, 278B, 280A, 280B, 280C, 280D, 282 and 288 to 293 of the Income-tax Act applies to equalisation levy as well.

New Provisions introduces by Finance Act 2020 (Applicable w.e.f. 01 April 2020):

• The scope of equalisation levy has now been widened to include e-commerce companies as well such as Amazon, Alibaba, etc., being non-resident not having any permanent establishment in India.
• Equalisation levy to be levied on consideration received/ receivable for e-commerce supply or services.
  • ‘e-commerce supply or services’ means following:
  • online sale of goods owned by the e-commerce operator
  • online provision of services provided by the e-commerce operator
  • online sale of goods or provision of services or both, facilitated by the e-commerce operator
  • any combination of above
• E-commerce operator for this purpose means a non-resident who owns, operates or manages electronic platform for supply of goods or provision of services.
• New section 165A inserted as charging section for Equalisation levy on e-commerce.
• Rate of levy will be 2% of consideration.
• Levy will be charged on supplies facilitated to-
  • Any person resident in India
  • Any person buying goods/ services/ both using IP address located in India.
  • A non-resident in following two circumstances:
    • Sale of advertisements which targets Indian resident customers or customer who access such advertisement through IP address in India.
    • Sale of Data collected from Indian residents.
• Equalisation levy on e-commerce operators not to be levied in following cases:
  • Where e-commerce operator has Permanent Establishment in India.
  • Turnover of e-commerce operator is less than Rs. 2 crores.
  • Equalisation levy is leviable under section 165 (online advertisement i.e., under existing provisions)
• Equalisation levy to be paid by E-commerce operators themselves on quarterly basis:

• Other existing provisions of equalisation levy will apply mutatis mutandis to this equalisation levy on e-commerce operators.

Conflict in Significant Economic Presence & Equalisation Levy

The Budget 2020 not only widened the concept of equalisation levy but also introduced the provisions for taxation of non-resident entities having ‘significant economic presence’. A new Explanation 2A has been inserted in section 9(1) of Income Tax Act 1961 defining the meaning of ‘significant economic presence’ of a non-resident and also considering it as ‘business connection’ in India. If it is established that any entity has business connection in India then any income in India becomes deemed to accrue or arise in India and thus, gets taxed in India.

In addition, another new Explanation 3A has been inserted in the same section which specifies that income from services of sale of data or goods & services using data collected from Indian residents or advertisement targeting Indian customers (on which equalisation levy has been introduced in this budget @ 2%) shall be considered as ‘income attributable to operations carried out in India’.

The game changes when proviso to the explanation clarifies that provisions of this Explanation 3A shall also apply to Explanation 2A meaning thereby that all activities on which currently equalisation levy is levied would be considered for determining significant economic presence of an entity and income arising from such operations would be deemed to accrue or arise in India resulting in taxation of that entity under Income Tax Act. However, provisions of Explanation 2A and Proviso to Explanation 3A have been deferred to FY 2021-22 due to consonance building exercise among OECD member nations. Anyways, whenever these would be applicable a conflict would arise between equalisation levy and provisions of Income Tax Act.

Note: There can be other implications of above provisions of equalization levy. Readers are requested to bring out other concerns/issues to the knowledge of author for discussion and analysis.