The Finance Act 2016, introduced equalization levy of 6% to be charged from amounts paid for specified services to a Non- resident not having any permanent establishment in India. This equalization levy (EL) is independent of income tax provisions and is covered under Chapter VIII of the Finance Act 2016.

1. Why Equalisation Levy was introduced ?

The digital economy is booming at a rapid pace and with the same pace companies keep on spending a large part of their revenue on online advertising. The major beneficiaries of this expenditure are international giants like Google, Facebook, Yahoo etc. Income paid to the companies engaged in digital business  is not liable  to Income Tax if they do not have a PE in India and further no withholding taxes is required to be deducted as per the provisions of the Income Tax Act,1961. The existing provisions of the Income Tax were not successful to bring this income from online advertising business within the tax ambit. The various judicial precedents held that the payments made for these services would be in the nature of business profits and in the absence of a PE would not be subject to income tax in India.

In view of the above said difficulties and in line with Base Erosion and Profit shifting (BEPS)  Action Plan-1, Equalisation levy was thus introduced through the Finance Act, 2016, which was made applicable w.e.f. 1st June 2016.

2. Practical aspects of Equalisation Levy

Although it was introduced way back in 2016 but still many of the tax payers are ignorant of this levy. So in this article an attempt would be made to highlight the practical aspects involved therein.

Type of transactions covered Clause (i) of Sec. 164 of Finance Act,2016 Specified Services meaning thereby

* Online advertisement

* Any provision for digital advertising space

* Any other facility or service for online advertisement

* Any other service as may be notified by Govt.

Rate of Tax {Sec. 165(1)} 6% of the amount of consideration paid
Payer {Sec. 165(1)}  * A person resident in India and carrying on business or profession; or

* A non-resident having a permanent establishment in India.

Payee {Sec. 165(1)} A non resident not having a PE in India
Threshold exemption {Sec. 165(2)} If the aggregate amount of consideration received or receivable in a previous year by the non resident from the payer as stated above does not exceed Rs. 1,00,000/-.
Grossing up required ? Does not prescribe any requirement but still advisable to gross up the levy @6.383% in case entire sum is required to be remitted.
 Due date of deposit {Sec. 166(2)} Seventh day of the month immediately following the said calendar month.
Interest on late payment (Sec. 170) Simple interest at the rate of one per cent for every month or part of a month.
Furnishing of Return {Sec. 167(1)} Statement in form no. 1 on or before 30th June immediately following that financial year.
Revision of Return {Sec. 167(2)} Before the expiry of two years from the end of the financial year in which specified service was provided.
Penalty for failure to deduct (Sec.171(b)(i) ) In addition to the paying the levy not deducted with interest a penalty equal to the EL that one failed to deduct.
Penalty when EL deducted but not (Sec. 171(b)(ii)) In addition to paying the levy not paid along with interest a penalty of Rs. 1,000 per day subject to a maximum of EL.
Disallowance of expense under Income tax As per sec. 40(a)(ib) if the said levy is not deposited before  the due date specified u/s 139(1) of the I.Tax, Act the expenditure incurred would be disallowed and shall be allowed only in the year of payment.

3. Negative aspect of Equalisation Levy

Although equalization levy was imposed upon the Global giants in the digital field which were easily evading tax both in the source country as well as their country of residence by registering themselves in tax heavens but ultimately it has not impacted them as they normally pass on this levy to their customers. Thus it has made digital advertising more expensive to those companies for whom placing of digital advertisement in international market has become a necessity and a means of their survival. 

4. Next step towards taxing digital transactions

Government is very keen to tax digital transactions and is always looking towards new ways to bring it into the tax fold.  Equalisation levy was one small step in this direction. To move further, an amendment was made to Section 9(1)(i) of the Income-tax Act, 1961.

Amendment made in the definition of Business Connection w.e.f. 01.04.2019

Explanation 2A was inserted in Section 9(1)(i) of the Income-tax Act, 1961 to bring in the concept of “Significant Economic Presence” for establishing “business connection” in the case of non-resident in India. Accordingly, significant economic presence shall mean– 

I. transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India if the aggregate of payments arising from such transaction or transactions during the previous year exceeds the amount as may be prescribed; or

II. Systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means.

However, in order to prescribe the thresholds as mentioned above, suggestions/comments of stakeholders and the general public were invited by the CBDT and the comments and suggestions so received are under consideration. So, as of now the thresholds have not been prescribed.

5. Final analysis

The scope of “Significant Economic presence” is very wide and includes online advertising and specified services contained in equalisation levy. But having both of them in the Indian tax laws, would lead to a real complication so as to determine whether a particular non- resident service provider would be covered under the threshold provisions under the “Significant economic presence” or under “Equalisation levy”. So Government should ensure clarity before implementation of any roll out of provisions of Significant Economic Presence, as any ambiguity may lead to complexities in the already complex Indian tax laws. But to avoid double taxation, Section 10(50) of the I.Tax Act provides that any income that is subject to Equalisation Levy will be exempt under it.

However, the existing provisions of Section 90(2) of IT Act provides that the provisions of Income Tax Act, 1961 or DTAA, whichever is more beneficial to the taxpayer shall prevail, thus the amendment in the Sec. 9(1)(i) of the Income Tax Act, 1961 may not lead to any impact on the digital transactions in India till the time corresponding modifications to PE rules are made in the DTAAs.

Disclaimer: The views expressed in this article are strictly of the author. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation by the author. The author does not accept any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereupon.

(Author can be reached at Email: puneetthukral2@gmail.com)

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Qualification: CA in Practice
Company: Puneet Thukral & Co.Chartered Accountants
Location: New Delhi, IN
Member Since: 06 Feb 2019 | Total Posts: 3

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