Equalisation Levy- A Brief Analysis

What is Equalisation Levy?

Intending to tackle taxation issues related to cyberspace transactions, India introduced Equalisation Levy in 2016.

Equalisation Levy is a tax levied on consideration for certain specified services that are being received/receivable by a non-resident not having a permanent establishment in India, from a person resident in India and carrying a business or profession, or from a non-resident having a permanent establishment in India.

Applicability

According to Section 163, the equalisation levy extends to the whole of India except the State of Jammu and Kashmir.

It shall apply to the consideration received/ receivable for specified services after the commencement of Chapter VIII- Equalisation Levy (and to the consideration received /receivable for e-commerce supply of goods or services made/provided/facilitated on or after the 1^st April 2020.)

Charge of Equalisation Levy

• Section 165: Charge of Equalisation Levy on specified services

Section 165 states that the equalisation levy shall be charged @6% on consideration for any specified services received/receivable by a non-resident from –

• A person resident in India and carrying on business or profession or;
• A non-resident having a permanent establishment (PE) in India.

 Provided that no equalisation levy shall be charged where:

• the NR has PE in India and income from specified services is effectively conducted to its PE.
• the payment for specified service by a person resident in India(or having PE in India) is not for the purpose of business or profession.
• the aggregate amount of payment received or receivable by the NR from the person resident in India (or from NR having PE in India) does not exceed Rs. 1 Lakh in any PY.

Illustration(Section 165): M/s ABC Pvt Ltd. an Indian company has availed online advertisement services of M/s XYZ Inc., a foreign company (and not having PE in India) for its business promotion and has a made payment of Rs. 10,00,000 to XYZ Inc. towards these online advertisement services.

As per provision of section 165, M/s ABC Pvt Ltd shall be required to deduct an equalisation levy@6% from the payment of Rs.10,00,000 .i.e. Rs.60000 (Rs.10,00,000*6%) and make payment of Rs. 9,40,000 to M/s XYZ Inc.

• Section 165A: Charge of Equalisation Levy on E-Commerce supply and services

Finance Act, 2020 has enhanced the scope of the equalisation levy by inserting a new section i.e. Section 165A. Equalisation Levy will now be applicable on e-commerce supply and services undertaken on or after 1^st April 2020

Provisions of Section 165A, explain that the equalisation levy shall be charged @2% on the consideration received/receivable by the e-commerce operator from e-commerce supply or services made or facilitated by it to-

• A person resident in India
• A person buying such goods or services or both using an IP address located in India.
• A non-resident in the specified circumstances i.e.
  • In case of sale of advertisement targeting customers:
    • Resident in India; or
    • Accessing advertisement through IP Address located in India.
  • In case of sale of data, collected data from a person:
    • Resident in India; or
    • Accessing advertisement through IP Address located in India.

Provided that the levy shall not be charged where:

• E-commerce operator making or facilitating e-commerce supply or services has a PE in India and is effectively connected with such PE.
• Equalisation levy is leviable under Section 165 or 
• Sales, turnover, or gross receipts, as the case may be, of the e-commerce operator from the e-commerce supply or services made or provided or facilitated do not exceed Rs. 2 Crores during the previous year.

Illustration (Section 165A): Amazon received consideration of Rs.5 crores towards the e-commerce supply of goods and services from M/s ABC Pvt Ltd (Indian Company) on or after 1^st April, 2020.

As per provision of section 165A, Amazon shall be required to pay amount of Rs. 10 lakhs (Rs.5 Cr*2%) as equalisation levy (2% of the income earned from ABC Pvt Ltd) and deposit the same to the Indian Government.

Collection and Recovery

• Section 166: Collection and Recovery of Equalisation Levy on Specified Services

The assessee liable to deduct the equalisation levy shall deduct the levy amount from the amount paid or payable to the NR in respect of the specified services and deposit it to Central Government by the 7^th day of the following month in which the levy is deducted. In case of failure to deduct the equalisation levy, the assessee shall be liable to pay the amount equal to the levy to the central government.

• Section 166A: Collection and Recovery of Equalisation Levy on E-Commerce Supply and Services

The E-commerce operator liable to deduct the equalisation levy shall deposit the amount deducted as a levy to the Central government for the quarter of the FY on or before the dates specified below:

Furnishing of Equalisation Levy Statement

The assessee/e-commerce operator liable to pay the equalisation levy has to furnish an equalisation levy statement electronically in Form No.1 for the specified services or e-commerce supply or services as the case may be entered during the FY on or before 30^th June of subsequent FY.

Provisions related to processing and rectification of statement

• Processing of statement by the department may result in any additional amount payable or refundable based on the information filed in the statement.
• No intimation shall be made after the expiry of one year from the relevant FY.
• Rectification order can be passed by the AO within the year from the end of the FY in which the order sought to be amended was passed.

Penal Provisions

Interest

Interest @1% shall be payable for every month or part of the month where the equalisation levy is deducted and not deposited within the due date of payment.

For instance:  A Ltd. deducted an equalisation levy of Rs. 1 lakh on 1^st June 2022 and deposit the same on 21st July, 2022. Since the due date of depositing the levy deducted for the month of June is 7^th July, A Ltd. is liable to pay interest@1% for two months (June and July) i.e. Rs. 2000 (Rs.1 Lakh *1%*2months) along with the levy amount.

Penalties

The penalty is not imposed if the assessee proves to the satisfaction of the AO that there was reasonable cause for the failure mentioned above.

Income Tax Provisions Related to Equalisation Levy

• Exemption under section 10(50): Section 10(50) was introduced by Finance Act 2016 to provide exemption on income arising from specified services on which equalisation levy is charged. It was further amended by Finance Act 2020 to include the e-commerce transaction income in exemption on or after 1st April 2021. However ,a clarification has been made in Finance bill 2021, that section 10(50) exemption should be effective from 1st April 2020 on e-commerce transactions and the equalisation levy shall not be applicable on income that is taxable as royalty or fees for technical services in India under Income-tax Act.
• Non-deduction of expense under section 40(a)(ib): According to section 40(a)(ib), if the equalisation levy is not deducted on specified services or deducted but not paid to the government, on or before the due date of filing income tax return, then consideration paid on specified services shall not be allowed as deduction to assessee. However, such deduction shall be allowed in the year in which the levy is actually deducted and paid to the government.
• Double Taxation Avoidance Agreement (DTAA): Benefits of DTAA are not available for equalisation levy in India since it is not a part of Income tax Act 1961. However, a non-resident may claim foreign tax credit of such equalisation levy in its resident country according to its domestic taxation law.31^st December