Equalisation Levy: India’s Answer to Digital Economy

1. Background

There has been significant expansion of Information and Communication Technology. With increase of E-commerce and newer concepts like cloud computing, the significance of Digital Economy in global market has increased manifold times.

Indian Income Tax Act majorly focused on the physical presence of enterprises for taxing them however Big Giants of Digital Space neither have permanent establishment nor do they receive their consideration in India as a result of which they don’t have to pay any tax in India till now.

On the basis of recommendation of Organisation for Economic Corporation and Development (OEDC) India, vide Budget 2016, has come up with the concept of Equalisation Levy to put an end to the free run for such multinational digital enterprises and to put them then in Tax Bracket. This taxation scheme has already been adopted by many countries like United Kingdom has levied Diverted Profit Tax, Australia has imposed Multinational Anti Avoidance Law, Italy has imposed Digital Tax.

2. What is Equalisation Levy?

Equalization Levy was introduced in India in 2016, with the intention of taxing the specified service* i.e. the income accruing to foreign companies from India. It is aimed at taxing business to business transactions.

*Specified Services includes

• Online Advertisement
• Any provision for digital advertising space or facilities/ service for the purpose of online advertisement;
• Any other provision of services as notified by Government

3. Applicability of Equalisation Levy

Equalisation Levy is just like TDS, and it is to 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.

 4. Rate of TAX under Equalisation Levy

The rate of tax was 6% on specified services as introduced in Budget 2016. However, The Finance Act 2020 made an addition to the Finance Act 2016, by introducing a new Equalisation Levy at 2% (Also Known as Equalisation Levy 2.0)

-Equalisation Levy 2.0

The 2 per cent Equalisation Levy was introduced in the 2020-21 Budget and has come into effect from April 1, 2020. The deadline for payment of first installment of tax for April-June is July 7. The tax would be levied on consideration received by e-commerce operators from online supply of goods or services.
The levy does not apply in the following cases:

1. E-commerce operator has a Permanent Establishment in India and the e-commerce supplies or services are effectively connected with such Permanent Establishment

2. Transactions covered by the Equalisation Levy under Finance Act 2016;

3. Where sales, turnover or gross receipts from e-commerce supplies or services is less than INR 20 million during the relevant tax year.

5. Consequences of Delayed Payments

The compliance procedure for the Equalisation Levy is the responsibility of the service recipient.

a) Penalty for failure of payment

b) Penalty for failure of filing statement of compliance

• INR 100/day for each day the non-compliance continues.

c) Prosecution

• If a false statement has been filled, then the person may be subjected to imprisonment of a term up to 3 years and a fine.

6. What is the fuss about?

• The government is not considering extending the deadline for payment of Equalization Levy by non-resident e-commerce players, even though a majority of them are yet to deposit the first installment of the tax.
• The challan was amended by the government barely three days before the first due date of installment payment of 7 July 2020, whereby providing a Permanent Account Number (‘PAN’) is a mandatory field. Many non-resident companies do not have a PAN and obtaining the same in three working days is practically not possible, leading to unintended delay in depositing the levy and thereby interest exposure.
• Many companies are not paying the equalization levy as there is still considerable confusion and lack of clarity on the applicability of the same.

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This article is co-authored by CS Sakshi Soni, Kolkata. She is a practicing CS with over 3 years of practical experience in the field of corporate law, finance, governance and strategy