Equalization Levy and Its Compliances?

Equalization Levy (EL) is a tax leviable on consideration received by a non-resident for specified services. Specified Service means online advertising or provision of digital space for online advertisement or any other service for purpose of online advertising.

Introduction

Equalization Levy is imposed under the Finance Act 2016 and not as a part of the Indian Income Tax Act, 1961. The Government introduced Equalization Levy vide Finance Bill, 2016, with the intention of taxing the digital transactions. As per Sec 165 of Finance Act 2016, a person resident in India or a non-resident having a permanent establishment in India shall deduct EL at 6% on the consideration paid to non-resident towards specified services.

The equalization levy is required to be deducted if the aggregate amount of consideration for such specified services by a non-resident person exceeds Rs 1 lakh and the payment is to carry out business or profession.

Salient Features of Equalization Levy (EL)

Equalization levy is applicable on: –

Specified services such as online advertisement, provision of digital space for online advertising, or related services. Such specific services are provided by a non-resident not having a Permanent Establishment (PE) in India. Payment against such services provided by the non- resident is made by an Indian resident carrying on business or by a non-resident having a PE in India. The threshold limit attracting equalization is Rs 1 Lakhs. The EL will be levied if the aggregate amount of consideration for such specified services received in a previous year exceeds Rs. 1 lakh. Equalization Levy is charged at the rate of 6% on the amount of consideration received/receivable by the nonresident. The person making the payment is liable for the deposit of EL to the Government treasury and all related compliances viz. the filing of EL return, etc. The EL deducted during the calendar month is to be deposit by every assessee to the credit of Central Government by the 7th of the following month through an Equalization levy Challan. The amount, which is subject to the charge of EL, is exempt from income tax under Section 10(50).

EL (Equalization Levy) 2.0

The Finance Act, 2020 expanded the scope of the EL to include all non-resident e-commerce operators providing e-commerce supply or services. As per the expanded provisions, with effect from 01 April 2020, a non-resident e-commerce operator is liable to pay Equalization Levy at the rate of 2% on the consideration received/receivable from e-commerce supply or services.

Salient Features of (Equalization Levy ) EL 2.0

The Equalization levy 2.0 does not apply to transactions already covered by the Equalization Levy under Finance Act 2016. Thus, services such as online advertisement, provision of digital space for online advertising, or related services are not subject to EL 2.0.
EL 2.0 is applicable on the online sale of goods or online provision of services or a combination of both by the non-resident e-commerce operator.
EL 2.0 is applicable where non-resident e-commerce operators supply to (a) person resident in India (b) Person using an Indian IP address (c) Non-resident in specific cases.
Examples of specific cases where supply to a non-resident is subject to equalization levy are (a) sale of advertisement to non-resident and such advertisement target Indian Resident (b) sale of data to non-resident and the data targets Indian residents.
The threshold limit attracting equalization 2.0 is Rs 2 Crores. The EL 2.0 shall be levied only if the aggregate amount of consideration for such specified services received in a previous year exceeds Rs. 2 crores.
EL 2.0 is charged at the rate of 2% on the amount of consideration received/receivable by the non-resident.
The non-resident e-commerce operator is liable for deposit the EL amount to the Government treasury & comply with the statutory requirements viz. the filing of EL return, etc. The onus of compliance cast on the nonresident e-commerce operator.
EL 2 is not applicable where E-commerce operator has a Permanent Establishment in India and the e-commerce supplies or services are effectively connected with such Permanent Establishment.

E-commerce Operator

E-Commerce operator means a non-resident, who owns, operates, or manages a digital platform or electronic facility for online sale of goods or online provision of services, or both.

E-commerce Supplies / Services

Equalization Levy 2.0 applies to the following specified E-Commerce supplies or services:
Online sale of goods owned by the e-commerce operator; or
Online provision of services provided by the e-commerce; or
Online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
Any combination of the above-mentioned activities.

Clarifications Vide Finance Act 2021

The following clarifications of Equalization Levy have been provided vide Finance Act 2021:
The Finance Act 2021 vide insertion of clause (CB) of section 164 of Finance Act 2016, increased the scope of E-Commerce supply substantially for Equalization Levy purposes. It is clarified that e-commerce supply shall include one or more following activities undertaken online-

(a) acceptance of offer for sale

(b) placing of purchase order

(c) acceptance of purchase order

(d) payment of consideration

(e) supply of goods or provision of services, partly or wholly.

The clarification vide Finance Act 2021 has expanding the scope of Equalization Levy and bringing an array of business within its ambit is The equalization levy can now be levied on payment portals, takeaway sales, and other predominantly off-line businesses that require physical presence but allow online booking like travel, theatre experiences, or hotel stays.

Consideration

It has been clarified vide Budget 2021 that consideration received or receivable from e-commerce supply shall include:

(a) consideration for the sale of goods irrespective of whether the e-commerce operator owns the goods

(b) consideration for the provision of services whether service is provided or
facilitated by the e-commerce operator. Now, e-commerce operators are to calculate equalization levy as a percentage of the entire consideration for supply collected by them, as opposed to the commission accruing to them. It could also be argued that the levy would apply even where e-commerce operators do not charge a commission.

Transactions Taxable Under Income-tax

The amended section 163 of the Finance Act, 2016, clarifies that consideration received or receivable for specified services shall not include the considerations, which are taxable as royalty or fees for technical services in India.

Compliances

The compliance burden of collecting and depositing EL 2.0 before due dates, furnishing statements, etc have been cast on non-resident E-commerce operator which is a practically unfavorable situation for non-resident ECO having no PE in India. As the EL does not form a part of the Income-tax Act, 1961, tax credit may not be allowed under the tax treaty for the EL paid in the source country and therefore it results in an additional cost to the business. The additional compliance burden increases platforms’ costs, which are eventually recovered from customers.

Conclusion

There are many more issues and challanges in implementation of Equalization Levy being discussed and debated at domestic and International level. The taxpayers are hoping to get appropriate clarification from the Government in order to allay several apprehensions on the scope of this levy.

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