written by | June 2, 2022

What Is the Equalisation Levy Under Income Tax?

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If you're not familiar with the Equalisation Levy, it's a tax introduced by the Finance Bill 2016 to provide equal opportunities to domestic businesses. According to the Equalisation Levy Act, businesses must pay the Equalisation Levy every year. The levy is 6% of the amount that the business receives. It must be deposited with the government within seven days after the end of the month. 

The government will also make a scheme for the centralised processing of statements. Under the scheme, TDS is deducted from the payments made by businesses. The remaining amount must be paid to the Govt. 

Did You Know?

Google's revenue in the year 2014-15 was ₹4,108 crores in India, which is why it is expected that the Equalisation Levy could fetch the Govt lots of money that until this point was not taxed. So many people refer to the Equalisation taxation as Google Tax because a significant portion of the online advertising budget goes to Google. 

What Is the Equalisation Levy?

Let’s start with the Equalisation Levy meaning. It is a direct tax on consideration received from non-residents for specified services. It is included in Chapter VIII of the Finance Act 2016 but does not form a part of the Indian Income Tax Act, 1961. 

The Equalisation Levy applies to certain digital transactions, including online advertisements. The Act specifies that non-residents who use digital advertising space in India are subject to this tax.

Equalisation is an important revenue-collecting measure. This is because it prevents businesses from obtaining an unfair advantage over domestic competitors through double taxation. 

As of 2018, the government collected more than ₹1000 Crores through the Equalisation Levy. However, it's unclear if Equalisation Levy will apply to businesses that do not operate in India.

Background and Relevance of Equalisation Levy

The inadequacy of physical presence is based on nexus rules that are in place in tax treaties. Also, it includes the flexibility of taxing payments as royalty or fees for technical services creating an ideal tax terrain for dispute.

To clarify this direction, To make this clearer, the government has introduced in Budget 2016 the Equalisation Levy to make one of the suggestions of the BEPS (Base Erosion and Profit Shifting) Action Plan.

  • In the last 10 years, IT has gone through an explosive growth phase in India and worldwide.
  • In turn, this has resulted in a variety of new business models, in which the majority of businesses rely on telecommunications and digital systems.
  • This has increased the supply and demand for digital services.
  • In the end, the new business models are accompanied by a series of new tax problems in terms of nexus and characterisation and the valuation of data and contribution.
  • To clarify the situation in this area, the government announced in the Budget 2016 the equalisation tax.

Many companies that provide services online have their own country of registration where tax rates are very low. They also pay very little tax on their worldwide income.

Also Read: What Is Compensation Cess under GST?

The Main Features of This Levy on Equalisation Are as Follows

The Equalisation Levy was introduced in Finance Bill 2016 in Union Budget 2016-17. Here are its characteristics of it:

  • It is taxed to the digital commerce transaction conducted without regard for national borders.
  • Specific services refer to online advertisements and any digital advertising or any other facility/service used for online advertising.  
  • The Equalisation Levy is 6% of the value of the consideration paid for specific services received or owed from a non-resident who does not have the permanence of a permanent establishment ('PE') in India or from a resident of India who is engaged in the profession or business, or from a non-resident who has a permanent establishment in India.
  • There is no levy if the total amount of consideration is not more than ₹1 lakh during any prior year.

Applicability of Equalisation Levy

Equalisation Levy is a tax directly which is withheld by the person who receives the service while paying it. It applies to an Indian resident who is engaged in any profession or business or who has a permanent business in India or if:

  • The money has been paid to a non-resident service company.
  • A service provider's total annual remittances are greater than ₹1 lakh for a single financial year.

It will be inapplicable in the following situations:

  • The non-resident service provider concerned has a permanent office in India. Also, the requested service is linked to that permanent establishment.
  • The total amount of the consideration to be paid for the specific service received or payable is less than ₹1 lakh.
  • The service described is not intended to be used to pursue work or profession.

Rate of Tax Under Equalisation Levy

The government launched Equalisation Levy vide Finance Bill 2016 to tax the electronic transactions.

According to Sec. 165 of Finance Act 2016, a person who is a resident of India and a non-resident with an established permanent residence in India is required to deduct an Equalisation Levy at 6% of the amount paid by non-residents to purchase specified services. 

The Equalisation Levy has to be deducted when the total amount of consideration received for the specific services provided by non-residents exceeds ₹1 lakh. The purpose of the payment is to fulfil professional or business activities.

Due Dates for Compliance 

The due date for submitting the Equalisation Levy Statement (Form-1) is June 30 of the Financial Year ended (unless the date is extended). The FY2020-21 budget has been extended. CBDT extends the deadline for submitting this Equalisation Levy Statement (Form-1) to December 31, 2021.

According to Section 166 of the Income Tax Act, the person accountable for deducting the Equalisation Levy has to take the Equalisation Levy deduction and then transfer the amount deducted to the Government accounts. This has to be completed within seven days, beginning at the end of the month the deduction was made.

Credit Availability in a Year

The credit for the surplus Equalisation Levy provided will be applied to the first year of taxable income in which the assessee is accountable for the tax liability due to the interim duration.

In the interest of pillar one, the credit would not be required for the assessment during the year of execution because of the first year that credits have been disclosed when pillar one is in use for the assessees in question and will be available in these years. 

However, the credit won't be granted to an assessee first being applied to pillar one more than four years later in India.

Equalisation Levy Expansion

In 2020 the most advanced version of the equalisation tax (EL) tax system will be in force in India. Based on this new system, it is essential for all online merchants who are not residents of India to be included in this tax directly.

By this updated version of EL, the non-resident digital service provider providing services via e-commerce is liable to taxation at a rate of 2%. This rate, however, is only applicable if the supplier of the e-commerce service is deemed to be.

Two key aspects of this new system of equalisation are:

  • This new EL is not applicable for transactions that the EL already covers in the Finance Act 2016. This means that the new taxing system doesn't apply to online advertising or the provision of digital space.
  • The new EL applies to non-residents operating in the e-commerce sector who are residents of India and customers who have their Indian IP address.

The threshold for this tax has been set at ₹2 crores instead of the ₹1 lakh that was the threshold for the Equalisation Levy in 2016.

Also Read: What is Ad Valorem Tax - Meaning and Importance

Consequences of Delayed Payments

  • Failure to deduct the levy: The penalty amount will be equivalent to the Equalisation Levy that the assessor failed to deduct.
  • The levy has been taken out but has not been deposited: The fine amount in this situation will be ₹1,000 per day that the default is over, but the amount of a penalty must be less than the sum of the Equalisation Levy.
  • If the assessee fails to provide the Equalisation Levy statement within the stipulated time frame, the assessee must be penalised by ₹100 per day if the default persists.

Conclusion

There were proposed amendments that were effective retroactively starting April 1, 2020. They seem to be quite broad in scope and could have a wide-ranging impact. 

It is beneficial if the government provides the appropriate clarifications as soon as possible. This is to dispel any concerns about the nature of this tax. 

Businesses will have to critically evaluate the effects of these new rules on their business models. Also, they must ensure compliance with the requirements. Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: How is Equalisation Levy 2.0 relevant in the e-commerce industry?

Ans:

The 2.0 version of the EL 2.0 can be used to access the services provided by:

  • An online sale of goods and services operated by an e-commerce company.
  • Online services are provided by and operated by an e-commerce company.

Q: What is Equalisation Levy in Income Tax?

Ans:

Equalisation Levy is basically a direct tax that stays on hold at the payment time by the service recipient.

Q: What is the best time for an operator to place the EL?

Ans:

The operator must deposit the required EL before the beginning of the month that follows the month in which the purchase was completed. The deposit should be made in the form of Central Government credit.

Q: What amount of the Equalisation Levies were imposed under the Finance Act, 2016?

Ans:

The EL rate in the Finance Act 2016 had been 6%. That means that a 6% rate will be applied to the amount that is to be paid.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.