Equalisation Levy: Provisions, Applicability & Implications for Non-Residents & E-commerce Operators

Understanding Equalisation Levy in India: Provisions, Applicability, and Implications for Non-Residents and E-commerce Operators

Learn about Equalisation Levy in India, the first country to introduce this concept. Explore its provisions, applicability, rates, and examples. Understand the distinctions between specified services and supplies by E-commerce operators. Discover the implications for non-resident service providers and the responsibility of E-commerce operators. Find out about payment procedures, non-applicability scenarios, and related provisions such as furnishing statements and consequences of failure to deduct or delay payment. Lastly, explore the possibility of claiming tax credits for Equalisation Levy paid in India in the country of residence.

Non-Residents & E-commerce Operators

Equalisation Levy

India was the first country in the world to introduce the concept of Equalisation Levy. These provisions were introduced in line with the recommendations of the Base Erosion and Profit Shifting (BEPS) Action Plan 1 which talks about the tax challenges arising for the digital economy.

Equalisation levy in India, was introduced vide the Finance Act 2016 to tax sale of goods or services through electronic or digital means by Non-Residents in India. The provisions relating to Equalisation Levy are contained in section 163 to 180 of the Finance Act 2016 read along with the Equalisation Levy Rules, 2016. Let us discuss the provisions pertaining to Equalisation Levy in detail along with necessary examples wherever required.

Applicability

Initially, Equalisation Levy was leviable only on certain specified services relating to online advertisement. However, with effect from 1^st April 2020, the scope was expanded to include sale of goods or provision of services by an E-commerce operator.

There are various distinctions between the specified services vis-à-vis the supplies made by the E-commerce operator. Such differences are plotted in the below table, for ease of reference:

Basis of distinction	Specified services	Supplies by E-commerce operator
Applicable from	01^st April 2016	01^st April 2020
Section of the Finance Act 2016 under which covered	Section 165	Section 165A (Introduced in Finance Act 2020 by way of an amendment to Finance Act 2016)
Definition (provided under Section 164 of the Finance Act 2016)	Specified services means: Online advertisement Provision for digital advertising space Any other facility or service for the purpose of online advertisement	E-commerce supply or services means: Online sale of goods owned by the e-commerce operator Online provision of services by the e-commerce operator Online sale of goods or provision of services or both, facilitated by the e-commerce operator any combination of activities listed above It does not matter whether the goods sold by the E-Commerce Operator are owned by the E-Commerce Operator
Supplier of goods or services	Non-resident person Residential status shall be determined under the Income Tax Act, 1961	E-commerce operator E-commerce operator means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both
Recipient of goods or services	Person resident in India and carrying on business or profession Non-resident having a PE in India	Person resident in India Person who buys the goods or services using an IP located in India Non-resident from Sale of advertisement targeted towards a customer resident in India or which is accessed using an IP located in India Sale of data collected from a person resident in India or from a person who used IP located in India
Rate of levy	6%	2%
Manner of payment of levy to government (Section 166 and 166A)	The person responsible for paying the consideration to the service provider shall deduct the levy and pay the same to the government every month within the due date	The E-commerce operator is responsible for payment of the levy to the government every quarter
Due date for payment (Section 166 and 166A)	7^th of every month immediately following the month in which the deduction was made	Quarter ending 30^th June – 7^th July Quarter ending 30^th Sept – 7^th October Quarter ending 31^st Dec – 7^th January Quarter ending 31^st March – 31^st March
Non-applicability	Non-resident providing the service has a PE in India and the service is effectively connected with that PE Aggregate amount received during the previous year from a single person does not exceed INR 1 lakh The service is obtained not for the purpose of business or profession	E-commerce operator has a PE in India and the e-commerce supply of goods or service is effectively connected with that PE Equalisation levy leviable under section 165 Goods owned by Indian resident or a PE of Non-Resident in India is sold through the E-commerce operator Total turnover during the previous year from the e-commerce supply or services does not excess INR 2 crore

Certain examples to better understand the above provisions:

Example 1: Facebook (a Non-Resident not having a PE in India) provides online advertisement services to M/s ABC Ltd. (a company resident in India).

Here, services specified under section 165 of the Finance Act 2016 is being provided by a Non-Resident (Facebook) who does not have a PE in India to a person resident in India (ABC Ltd) carrying on business or profession. Therefore, M/s ABC Ltd will deduct Equalisation Levy at 6% and remit it to the government.

Example 2: Facebook (a Non-Resident not having a PE in India) provides online advertisement services to M/s ABC Inc (a non-resident who has a branch in India).

Here, services specified under section 165 of the Finance Act 2016 is being provided by a Non-Resident (Facebook) who does not have a PE in India to a Non-resident having a PE in India. Therefore, M/s ABC Inc will deduct Equalisation Levy at 6% and remit it to the government.

Example 3: Alibaba (a Non-Resident E-commerce operator not having a PE in India) delivers goods to Mr. A (a person resident in India).

Here, the supply of goods by Alibaba falls within the definition of E-commerce supply or services in terms of section 165A of Finance Act 2016. Therefore, Alibaba shall be liable to pay equalization levy at the rate of 2% to the government of India. It does not matter whether Mr. A consumes the goods for his business or for his personal use.

Example 4: In the above example if Mr. A is a non-resident and has come to India on a vacation. He orders certain goods from Alibaba to be delivered to his address in the foreign country.

Still, Equalisation levy would be applicable since the goods were ordered using an Interest Protocol (IP) address located in India. The place of delivery, ultimate use of the goods or services by the customer and the residential status of the customer, does not matter.

Example 5: M/s ABC Inc (an E-commerce operator) provides advertisement services to M/s XYZ Inc. of USA. The advertisement targets customers in India.

The above service will be covered under the provisions of Section 165A and therefore, equalization levy @ 2% shall be applicable.

Example 6: In the above example, if M/s ABC Inc provides advertisement services to M/s XYZ Inc. of USA (which has a PE in India), then the services will get covered under section 165 and equalization levy @ 6% shall be deducted by XYZ Inc and remitted to the government.

Example 7: Facebook (a Non-Resident not having a PE in India) provides advertisement services to Mr. A advertising that Mr. A is looking for a bride.

Here, services specified under section 165 of the Finance Act 2016 is being provided by a Non-Resident (Facebook) who does not have a PE in India to a person resident in India (Mr. A). However, the said advertisement is for the personal purpose of Mr. A and not for his business or profession. Therefore, Equalisation Levy shall not be applicable.

Example 8: Mr. A (a person resident in India) sells goods owned by him through Alibaba (an E-commerce operator). In this case, Equalisation Levy shall not be applicable Facebook (a Non-Resident not having a PE in India) provides advertisement services to Mr. A advertising that Mr. A is looking for a bride.

Thus, where the services get covered under section 165, section 165A shall not be applicable.

Certain other provisions relating to Equalisation levy

Furnishing of statement
A statement in Form No. 1 shall be furnished by the assessee or e-commerce operator on or before 30^th June of the assessment year.
Where an assessee or e-commerce operator fails to furnish the statement in Form No. 1 within the time limit specified above, the Assessing Officer shall issue a notice requiring that the statement be furnished within 30 days from the date of service of the notice.
However, where the statement is not furnished within 30 days even after service of the notice, penalty of Rs. 100 per day shall be levied until the date of furnishing of the statement.
In any case, the assessee or the E-commerce operator shall have a maximum time limit of two years from the end of the financial year in which the services or goods are supplied to furnish the statement in Form No. 1.

Failure to deduct or delay in payment of Equalisation levy

In case of delay in payment of the Equalisation levy to the credit of the government, interest at the rate of 1% per month or part of the month shall be levied on the amount unpaid to the government
In addition to the interest payable, penalty at the rate 100% of the amount not deducted or not paid to the government shall also be levied.
Further, failure to deduct Equalisation levy or failure to pay Equalisation levy after deduction shall attract disallowance under section 40 of the Income Tax Act.
Where the income of a non-resident is leviable to Equalisation levy, such income shall not be included in the total income of the Non-Resident.

Can the Non-resident claim the tax credit in the country of residence of the Equalisation Levy paid in India?

Where two or more countries are involved in taxing the income of an assessee, the Double Taxation Avoidance Agreements (DTAAs) entered between the countries shall come into play.
Most of the DTAAs entered by India define the taxes covered in the DTAA. However, Equalisation Levy is not yet part of the definition of taxes covered.
Furthermore, granting of tax credit of the equalization levy paid in India shall depend on the domestic laws of the foreign country.

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