Over the last few years, Information Technology has  been taken as new exponential measure in India and globally for the new models of business, which has increased in the demand of digital services. In the current scenario, we have big reliance on internet for the e-business. As a result, new business models have created new challenges in the chapter of income tax. As the physical presence of these business models are not available in the existing tax acts, so government has introduced the equalisation levy to give effect to one of the recommendations of the BEPS (Base Erosion and Profit Shifting) Action Plan. Here we have discussed and answered the questions in easy understandable format, so as to provide the basic understanding of the concept.

Q 1. What is Equalisation Levy?

Ans:  Equalisation Levy was introduced in 2016 with intention of taxing the digital transaction i.e. income accruing to e-commerce company from India.

Finger with popular social media logos printed on paper.

Q 2. When Equalisation Levy is applicable?

Ans:  It is applicable when,

  • Amount paid for ‘online advertisement’, ‘any provision of service related to online advertisement’.
    • Therefore, for any other service other than online advertisement, equalisation levy not applicable.
  • Gross amount paid is more than Rs. 100000
    • If amount is less than Rs. 100000, then not applicable.
  • Flow of service.

(i) RESIDENT (Service Receiver) paying consideration to NON-RESIDENT (Service Provider)

(ii) NON-RESIDENT (Service Receiver) (having permanent establishment in India) paying consideration to NON-RESIDENT (Service Provider)

  • If Non-Resident (Service Provider) is having permanent establishment in India and such service provided is having direct connection with this establishment, then Equalisation Levy is not applicable.

Q 3. What is rate of Equalisation levy?

Ans:  6% on the gross amount charged.

Q 4. How to charge the equalisation levy from the payment?

Ans: Every resident person and non-resident (having a permanent establishment in India) is required to withhold Equalisation Levy while making payment to a non-resident service provider.

The concept of chargeability shall be based on grossing up the amount. Suppose, service has been taken for a consideration of Rs.150000. the amount of Equalisation levy shall be calculated by grossing up of 6% in Rs.150000, which is (150000*.06)/1.06 = 8490. So Service receiver in India shall make a payment of Rs.150000-8490= Rs.141510.

Q 5. Deposit of Equalisation Levy to government?

Ans: The amount deducted should be paid to government, same like TDS, i.e. 7th of next month by challan no.285.

  • However, if payment is delayed, then it carries a simple interest at 1% of the outstanding levy for every month or part thereof.

Q 6. Furnishing of Annual statement of Equalisation Levy?

Ans:  Service recipient is required to make compliance and also file an annual statement in respect of services received in form no. 1 on or before 30th June of financial year ended, in which details are required for non-resident person also.

Q 7. What if there is non-compliance by service recipient?

Ans:  The consequences of each default are mentioned below;

  • Penalty for Equalisation Levy not deducted: Penalty equal to the amount of levy failed to be deducted (along with interest and depositing of the principal levy outstanding)
  • Penalty for Equalisation Levy deducted but not deposited: Penalty equal to INR 1,000/day subject to the maximum of the levy failed to be deducted (along with interest and depositing of the principal levy outstanding)
  • Penalty for failure of filing statement of compliance: INR 100/day for each day the non-compliance continues.
  • Prosecution for false statement furnished: If a false statement has been filed then the person may be subjected to imprisonment of a term up to 3 years and a fine.
    • However if service receiver make any default mentioned above then there will be disallowance of such expenditure in the hands of the payer (unless the defect is rectified).

Procedure for Accounting and Payment of Equalisation Levy

  • Person making the payment should provide the details of payment to be made during the month before 3rd day of the next month as per attached format, and sent it to accounts department.
  • Accounts department to pass entry after grossing up the payment of equalisation levy, if applicable and deposit the same to government in challan no. 285 before 7th and pass the entry.
  • After the close of financial year, accounts to file the annual return in Form no. 1 before 30th June for the tax deposited

Format of Details of Equalisation Levy

Sr. No. Date Bill No. Party Name Address Pan (if applicable) Payment Mode of Payment Details of Payment
Amount ($) Amount (₹)

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Qualification: CA in Job / Business
Company: M/s Kangaro Industries Limited
Location: Ludhiana, Punjab, IN
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2 Comments

  1. Naman maheshwari says:

    How to withhold tax while making online payment to facebook for advertisement. There is no option available on its site. Let say,the advertisement cost is 150000/-, then we have to pay whole amount then and there…We have no option to deduct tax. What to do in such cases ? Please explain .

    1. Cabhatia says:

      Where such option is not available, then you have to bear tax expense.In such case..
      you have to gross up the value.
      That is (150000*.06)/.94 = 9574
      That means , it is assumed that you were obliged to pay rs. 159574,
      after deducting 9574 (159574*.06) , net 150000 is being paid to the non-resident.

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