Introduction
The Equalisation Levy, often referred to as the “Google Tax,” was introduced in India in 2016 as a groundbreaking measure to tax income arising from digital transactions conducted by foreign e-commerce companies. This levy is specifically designed to target business-to-business (B2B) transactions, ensuring that foreign entities conducting substantial business with Indian firms contribute their fair share of taxes. The initiative reflects India’s proactive approach to modernizing its tax system in response to the evolving digital economy, which traditional tax frameworks struggle to regulate effectively. By implementing the Equalisation Levy, India aims to address the tax base erosion caused by digital transactions, thereby promoting a more equitable taxation landscape.
Background and Relevance of Equalisation Levy
Over the past decade, the exponential growth of Information Technology has dramatically transformed both global and Indian economies. The widespread adoption of digital services and the advent of innovative business models that leverage digital and telecommunication networks have revolutionized how businesses operate. This digital proliferation has led to the creation of new revenue streams and business practices, many of which fall outside the scope of conventional tax regulations. The resulting tax challenges include issues related to establishing a tax nexus, accurately characterizing digital transactions, and valuing data, all of which are not adequately addressed by traditional tax treaties that rely on the physical presence of businesses.
To tackle these challenges and ensure a fair taxation system, the Indian government introduced the Equalisation Levy as part of the 2016 Budget. This measure aligns with the recommendations of the Base Erosion and Profit Shifting (BEPS) Action Plan, an initiative led by the Organisation for Economic Co-operation and Development (OECD) to combat tax avoidance strategies that exploit gaps and mismatches in tax rules. The Equalisation Levy is a pivotal step in India’s efforts to create a level playing field in the digital economy, ensuring that foreign e-commerce companies contribute to the tax revenues in the jurisdictions where they generate significant economic value. This approach not only addresses the immediate tax revenue concerns but also sets a precedent for other countries grappling with similar issues in the digital age.
Applicability of Equalisation Levy
In fact, Equalization Levy is a direct tax, which is withheld at the time of payment by the service recipient. Following the conditions are required to be met to be liable to equalisation levy –
(a) The service provider should be a non-resident who doesn’t have in India;
(b) The service recipient should be a resident, or non-resident who have PE in India;
(c) The annual payment made to one service provider exceeds Rs. 1,00,000.00 in one financial year;
(d) The services should be used in India for carrying out the business or profession.
The following services were covered for levying equalization levy –
(a) Online advertisement (w.e.f. 01/06/2016);
(b) Any provision for digital advertising space or facilities/ service for the purpose of online advertisement (w.e.f. 01/04/2020)
Currently the applicable rate of tax is 6% of the gross consideration to be paid.
Compliance and Due Dates for Equalisation Levy
Tax must be deposited by the 7th of the month following the deduction. An annual Equalisation Levy Statement (Form-1) must be filed by June 30th following the end of the financial year.
Consequences of Delayed Payments of Equalisation Levy
Interest: Charged at 1% per month on the outstanding levy.
Equalisation Levy Non-Compliance Penalties
(a) Failure to deduct levy: Penalty equal to the levy amount.
(b) Deducted but not deposited: Interest at 1% per month or part thereof and a penalty of INR 1,000 per day, up to the levy amount.
(c) Failure to file the compliance statement: INR 100 per day.
(d) Filing a false statement: Potential imprisonment up to 3 years and a fine.
(e) The compliance procedure for the Equalisation Levy is the responsibility of the service recipient.
Other Points related to Equalisation Levy
- If Equalisation Levy is not deducted then penalty will be equal to the amount of levy failed to be deducted (along with interest and depositing of the principal levy outstanding).
- Moreover, there is a provision of disallowance of such expenditure in the hands of the payer, unless the defect is rectified.
Conclusion: India’s Equalisation Levy represents a strategic response to tax challenges posed by the digital economy’s rapid growth. By taxing income from online advertisements and other digital services provided by foreign e-commerce companies, this levy enhances tax compliance and revenue collection. Understanding its applicability, compliance requirements, and potential penalties is crucial for businesses operating in the digital space, ensuring adherence to Indian tax regulations and avoiding financial liabilities.
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