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Equalisation levy:

Meaning and Purpose of Equalisation levy:

In this digital era, business and its operations are not restricted to geographical boundaries.

With the emergence and involvement of Internet into businesses, area and locations have become irrelevant. Businesses have free access to various markets. The traditional structure of taxing businesses based on their jurisdiction no longer works in such cases.

Due to emerging start-ups and other business on digital models, Government is eager to explore means to tax such business.

To cope up with the changing business models and emerging digital economy, Government introduced Equalisation Levy vide Finance Bill, 2016.

The transition from 2016 to 2021 of Equalisation levy

Since its introduction, equalisation levy has been raising many complications and complexities due to many practical issues because of its nature and scope.

We will understand how scope, applicability, rates etc have been modified throughout the years.

Equalisation Levy: Introduction of the tax: 2016

Equalisation levy at 6% would be taxed on any consideration received/receivable by a non- resident from

  • A person resident in India and carrying any business or profession
  • A non-resident having PE in India.

A person resident in India or a non-resident having PE in India shall deduct EL at 6% if the consideration paid or payable to such non-resident entity exceeds 1 lakh.

It was taxed as a structure of TDS, where payer is supposed to deduct tax amount and deposit the same to the Government before 7th of the next month.

Non-applicability of Equalisation levy (EL): 2016

  • Non-resident supplier has a PE in India and provision of such specified service is effectively connected to such PE
  • The aggregate amount of consideration for specified service, received or receivable from a person resident in India and carrying any business or profession or a non-resident having PE in India does not exceed 1 Lakh.
  • The payment of consideration for the specified service for the person resident in India or non-resident having PE, is not for the purpose of business or profession.

Specified Service: means online advertising or provision of digital space for online advertisement or any other service for purpose of online advertising.

Equalisation levy was also known as google tax.

Equalisation Levy: Modification of the tax: 2020

The Finance Act, 2020 widened the scope of Equalisation levy.

Earlier, the tax was applicable only for service provider providing services of online advertising, provision of digital space for online advertising or other services facilitating online advertising, now the scope was widened to include all e-commerce supplies and services.

E-commerce Supplies and service: 

  • Online sale of goods owned by the e-commerce operator;
  • Online provision of services provided by the e-commerce operator;
  • Online sale of goods or provision of services or both, mediated by the e-commerce operator;
  • Any combination of above activities

Equlaisation levy at 2% will be applicable if any e-commerce supplies or service is received by Indian resident customer, or which targets a customer who accesses the advertisement through an IP address located in India or Sale of data collected from an Indian resident or from a person who uses an IP address located in India

Non- applicability of Equalisation levy: 2020

  • Non-resident supplier has a PE in India and provision of such specified service is effectively connected to such PE
  • Where aggregate value of consideration for a specified transaction does not exceed 2 crores.

This amendment made all e-commerce operators come under the umbrella of taxability.

Several Industry like retail, travel and hospitality, aggregators, education, media and entertainment  were supposed to get affected by this.

The compliance burden had shifted to E-commerce operator by then.

Equalisation levy : 2021

Due to various ambiguities, Union Budget 2021 brought certain modifications and clarifications.

An explanation is inserted to Section 163 of The Fianace Act,2016 vide Union Budget 2021 which specifies that consideration received or receivable for specified service or e-commerce supply or service shall not include consideration taxable as royalty or fees for technical service under section 90 or 90A of the act.

An explanation is inserted to Section 164 of Finance Act. 2016 which provides that for the purpose of e-commerce supply or service, online sale of goods and online provision of service shall include one or more of the following activities taking place online:

(a) Acceptance of offer for sale;

(b) Placing the purchase order;

(c) Acceptance of the Purchase order;

(d) Payment of consideration; or

(e) Supply of goods or provision of services, partly or wholly

Union Budget 2021 proposes to amend Section 165A of The Finance Act, to provide that consideration received or receivable from e-commerce supply or services shall include

  • consideration for sale of goods irrespective of whether the e-commerce operator owns the goods; and
  • consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator

Which includes aggregator/mediator under the purview of tax.

Equalisation levy has shifted from B2B to B2C model and which’s burden will ultimately be passed to consumers and buyers.

Equalisation Levy has always been a topic of discussions due to its many open areas. Many issues are still uncleared,

  • The compliance burden of collecting EL, depositing EL before due dates, furnishing statements etc have been casted on non-resident E-commerce operator which is a practically unfavourable situation for non-resident ECO having no PE in India.
  • The additional levy of tax will eventually be shifted to buyers .
  • The double tax Avoidance treaties with various countries will stand questionable as no benefits would be available, EL not being a part of Income tax law, resulting in unjust double taxation.

Some practical issues are faced like,

  • What constitutes a digital platform? Is advisory service/consultancy rendered through E-mail be covered?
  • According to the section interpretations, tax will be levied on inter-company transactions and reseller agreements, for which no exemption is provided
  • Will EL be applicable where services are booked online but provided through physical delivery/ physical provision of service (eg: hotel booking)
  • Will the credit of EL paid be available for paying taxes in overseas jurisdiction.

To conclude, EL is a tangled and burdensome tax regime which creates numerous complexities at both interpretation and practical levels.

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May 2024