Equalisation Levy under Income Tax Act of 1961

The continuous growth and expansion of Information and Technology sector has directly led to a rapid increase in procurement of digital goods and/ services, and the same is now availed in almost each and every home, and now more and more companies are involving themselves into the digital sector, and that’s why this economy is growing at a much larger phase than the overall growth of economy as a whole.

But said prospects have thereby led to certain challenges and issues that have arise during transactions and also post transactions especially in e-commerce sector and in cross border procurement like:

1. Difficult to identify the nature of payment

2. Difficult to establish a connection between Taxable transaction and the jurisdiction that is taxing

3. Difficult to locate the place of transaction, the concerned activity as well as the identification of taxpayer.

For overcoming such challenges, the Finance Act of 2016 has in it’s Chapter VIII have provide for a concept of ‘equalisation levy’ to be levied of 6% of the total amount for certain specified services that are being received or to be received at later by such Non-Resident, that don’t have his/her permanent establishment in India, from a resident in India, or from such non-resident that has their permanent establishment here.

Applicability: It is a kind of direct tax that stands withheld at time of payment by service recipient and two important conditions that need to be met here is:

1. Payment to be made to non-resident service provider

2. Annual payment to single service provider exceed Rs. One Lakh in single financial year.

As have been amended by the Finance Act of 2020, equalization levy of almost 2% needs to be charged by an e-commerce operator[1] from such supply[2] made to:

1. Person resident in India

2. Non-resident in certain circumstances

3. Such person that buy such goods or services using an internet protocol of India.

This 2% needs to be charge on or after 1st April, 2020.

Such equalization levy won’t be charged in the below mentioned circumstances:

1. Where it is levied u/s 165 of 1961 Act.

2. Where this e-commerce operator is providing or facilitating such e-commerce supply, has a permanent establishment in India, and the concerned supply here is directly connected to such permanent establishment.

3. Where the revenue or sale figures of such e-commerce operator by engaging in such e-commerce supply in the previous year is less than Rs. 2 Crore.

Specifically looking from the point of view of Income Tax, all such transactions that comes under the ambit of equalization levy are exempted from paying such income-tax.

Certain services covered under this mechanism:

1. Online Advertisement

2. Provision for digital advertising facilities or such services for purpose of online advertisement

Payment mechanism as described below to be paid to credit of Central government by the concerned non-resident e-commerce operator:

No. Last date of quarter Due date of payment
1. 30th June 7th July
2. 30th September 7th October
3. 31st December 7th January
4. 31st March 31st March

Penal Provisions (Verbatim as per Income Tax Act):

Interest on delayed payment of equalisation levy.

170. Every assessee or e-commerce operator, who fails to credit the equalisation levy or any part thereof as required under section 166 or section 166A to the account of the Central Government within the period specified in that section, shall pay simple interest at the rate of one per cent of such levy for every month or part of a month by which such crediting of the tax or any part thereof is delayed.

Penalty for failure to deduct or pay equalisation levy.

171. Any assessee or e-commerce operator who—

(a) fails to deduct the whole or any part of the equalisation levy as required under section 166; or
(aa) fails to pay the whole or any part of the equalisation levy as required under section 166A; or
(b) having deducted the equalisation levy referred to in sub-section (1) of section 165, fails to pay such levy to the credit of the Central Government in accordance with the provisions of sub-section (2) of that section,
shall be liable to pay,
(i) in the case referred to in clause (a), in addition to paying the levy in accordance with the provisions of sub-section (3) of that section, or interest, if any, in accordance with the provisions of section 170, a penalty equal to the amount of equalisation levy that he failed to deduct; and
(ia) in the case referred to in clause (aa), in addition to the levy in accordance with the provisions of that section, or interest, if any, in accordance with the provisions of section 170, a penalty equal to the amount of equalisation levy that he failed to pay; and
(ii) in the case referred to in clause (b), in addition to paying the levy in accordance with the provisions of sub-section (2) of that section and interest in accordance with the provisions of section 170, a penalty of one thousand rupees for every day during which the failure continues, so, however, that the penalty under this clause shall not exceed the amount of equalisation levy that he failed to pay.

Penalty for failure to furnish statement.

172. Where an assessee or e-commerce operator fails to furnish the statement within the time prescribed under sub-section (1) or sub-section (3) of section 167, he shall be liable to pay a penalty of one hundred rupees for each day during which the failure continues.

Industry-wise Impact (limited to such industries that are in demand since COVID)

1. Retail: Online sale of goods, Online provision of services, etc.

2. Travel and Hospitality: Hotel bookings, online ticket services, etc

3. Education: Foreign universities offering e-courses, online examinations, etc.

4. Media and Entertainment: OTT Platforms like Netflix/ Amazon Prime Video, online subscription to print media and gaming platforms per se.

5. IT: Software sales, selling customized software, IT enabled services per se.

6. Communication: Video conferencing, Voice Calls via internet, etc.

Issues & Challenges (limited to present situation and can be more):

1. Applicability and procedural aspects not adequately mentioned as well as the constitutional validity on one side as well as the extra-territorial jurisdiction is also a debatable issue at present especially during COVID times.

2. What can come under digital platform or digital facility is very much open for interpretation and can have adverse consequences if left open.

3. Since the exemption from paying income-tax applies only on or after 1st April 2021, there were some of the recent issues wherein some of the non-resident recipients not only paid equalization levy but also income tax, thereby a kind of double taxation.

4. Availability of credit of equalization levy in the home country of such non-resident e-commerce operator is not provided under our income tax laws and rules therein, and are left open to concerned home country’s rules per se, which might add the sunk cost to such non-residents.

5. No exemptions provided in case of inter-company transactions, and this is one of the major hurdles for such subsidiary companies of such non-residents e-commerce operators that are placing orders from their parent company situated outside India

6. Overseas e-commerce supply are subjected to equalization levy on one hand and GST (in case of import of services) or Custom Duty (in case of import of goods), thereby attracting double taxation

Concluding Remarks: Digital economy is swiftly getting intertwined with the traditional economy, thereby making it harder to define and outline digital economy’s true meaning. The above mentioned issues and challenges continued to remain a hurdle in complying with all the necessary rules and obligations and therefore what remains open now for the government is to actually identify, assess and remove such obstacles that remains in the path of fulfilling the goal of complete digital economy, and at the same time, the businesses need to assess the risks, opportunities, and the obligations arising from the same.

Note: Please also look at the concerned Sections from Sec.163-180 for overall understanding.

[1]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

[2]e-commerce supply or services means-

(i) online sale of goods owned by the e-commerce operator

(ii) online provision of services provided by the e-commerce operator

(iii) online sale of goods or provision of services or both, facilitated by the e-commerce operator

(iv) any combination of activities listed in clause (i), (ii) or clause (iii)

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Disclaimer:- The entire contents of this document have been prepared on the basis of relevant provisions and rules and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.

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Qualification: CS
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Location: Shubham Phophalia, Gujarat, India
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I am Shubham from Batch 2016-21 of GNLU. I am in my final year of 5 years integrated BA LLB course from GNLU, Gandhinagar, and I have completed Company Secretary Course meanwhile with 3rd Rank in Ahmedabad, Gujarat in CS Professional. I am a keen reader and enthusiastic listener of Corporate laws an View Full Profile

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