Equalisation Levy: The Digital Tax

Equalisation Levy: The Digital Tax
26 May 2020

Equalisation Levy: The Digital Tax

Over the last decade, Information Technology has gone through an exponential expansion phase in India and globally. This has led to an increase in the supply and procurement of digital services. Consequently, this has given rise to various new business models, where there is a heavy reliance on digital and telecommunication networks.

As a result, the new business models have come with a set of new tax challenges in terms of nexus, characterization, and valuation of data and user contribution. The combination of the inadequacy of physical presence based nexus rules in the existing tax treaties and the possibility of taxing such payments as royalty or fee for technical services creates a fertile ground for tax disputes.

To bring in clarity in this regard, the government introduced vide Budget 2016, the equalization levy to give effect to one of the recommendations of the BEPS (Base Erosion and Profit Shifting) Action Plan.

Charge of Equalisation Levy (Sec – 165)

Section 165 of the Finance Act, 2016 deals with the provisions related to the charge of equalization levy. Equalization levy shall be charged @ 6% of the amount of consideration payable, for any specified service received or receivable from a non-resident, by –

  1. A person resident in India carrying on any business or profession; or
  2. A non-resident having a permanent establishment in India.

“Specified Service” means an online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement, or includes any other service as may be notified by the central government in this behalf.

Equalisation levy under sub-section (1) shall not be charged in the following cases: 

  1. The non-resident providing specified service has a permanent establishment in India and the specified service is connected with such permanent establishment; or
  2. The specified service is not for the purpose of carrying out business or profession (i.e. for personal purpose); or
  3. The aggregate amount of consideration payable for the specified service received or receivable does not exceed Rs. 1 Lakh.
When Equalisation Levy is applicable?

It is applicable when,

  1. Amount paid for ‘online advertisement’, ‘any provision of service related to online advertisement’.
    1. Therefore, for any other service other than online advertisement, equalization levy not applicable.
  2. The Gross amount paid is more than Rs. 100000
    1. If the amount is less than Rs. 100000, then not applicable.
  3. The flow of service:
    1. RESIDENT (Service Receiver) paying consideration to NON-RESIDENT (Service Provider)
    2. NON-RESIDENT (Service Receiver) (having a permanent establishment in India) paying consideration to NON-RESIDENT (Service Provider)
  4. If Non-Resident (Service Provider) is having a permanent establishment in India and such service provided is having a direct connection with this establishment, then Equalisation Levy is not applicable.
Payment of Equalisation levy and Interest/Penalty:
  1. Payment of Equalisation levy deducted: The equalization levy so deducted during any calendar month shall be paid by every assessee to the credit of the Central Government by the seventh day of the month immediately following the said calendar month.
  2. Interest on delayed payment: In case of delayed payment assessed shall pay simple interest at the rate of 1% of such levy for every month or part of a month by which such crediting of the tax or any part thereof is delayed.
  3. Penalty for failure to deduct Equalisation levy: Any assessee who fails to deduct such levy shall pay in addition to pay such levy and interest, a penalty equal to the amount of equalization levy that he failed to deduct.
  4. Penalty for failure to pay Equalisation levy: Any assessee who has deducted the equalization levy but fails to pay such levy to the credit of the Central Government in addition to pay such levy and interest, 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.

However, No order imposing a penalty under this Chapter shall be made unless the assessee has been given a reasonable opportunity of being heard. No penalty shall be imposable for any failure referred to in the said sections if the assessee proves to the satisfaction of the Assessing Officer that there was reasonable cause for the said failure.

Furnishing of Statement:
  1. Statement/return of Equalisation levy shall be filed annually i.e. after the end of each financial year. However, the due date for furnishing the statement yet to be prescribed.
  2. An assessee who has not furnished the statement within the time prescribed or having furnished a statement, notices any omission or wrong particular therein, may furnish a statement or a revised statement, as the case may be, at any time before the expiry of two years from the end of the financial year in which the specified service was provided.
  3. Where any assessee fails to furnish the statement within the prescribed time, the Assessing Officer may serve a notice upon such assessee requiring him to furnish the statement.
  4. After processing of such a statement, an intimation shall be generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, him.
  5. Where an assessee fails to furnish the statement within the time prescribed, he shall be liable to pay a penalty of one hundred rupees for each day during which the failure continues. (However, No order imposing a penalty under this Chapter shall be made unless the assessee has been given a reasonable opportunity of being heard. No penalty shall be imposable for any failure referred to in the said sections if the assessee proves to the satisfaction of the Assessing Officer that there was reasonable cause for the said failure.)
Punishment for False Statement:

If a person makes a false statement in any verification under this Chapter or any rule made thereunder, or delivers an account or statement, which is false, and which he either knows or believes to be false, or does not believe to be true, he shall be punishable with imprisonment for a term which may extend to three years and with fine.

In order to avoid double taxation, it is proposed to provide exemption under section 10 of the Act for any income arising from providing specified services on which equalization levy is chargeable.

In order to ensure compliance with the provisions, it is further proposed to provide that the expenses incurred by the assessee towards specified services chargeable shall not be allowed as a deduction in case of failure of the assessee to deduct and deposit the equalisation levy to the credit of Central government.

2% Digital Tax:

India announced that digital service providers will be subject to a 2% tax. This tax, also known as equalisation levy, will be charged on the services provided in India where the payments are taken abroad.

E-commerce companies such as Amazon and eBay will also be affected by the tax. In fact, any overseas platform that streams, advertises, or sells goods to an Indian IP address will be taxable, according to the new law that is set to be implemented starting April 1.