Equalisation Levy – a devise to tax online income earned by Non Resident in India:

To address tax challenges arising from digital Economy, effective June 1, 2016, a new levy in the name of “Equalisation Levy” has been introduced. This levy has been introduced by way of a new chapter in Finance Act 2016 and is charged on the consideration paid to non-resident person for online advertisement services. However, amendment has been made to these provisions by the Chapter VI of Finance Act 2020 to include the consideration received for e-commerce supply or services by non-resident e-commerce operator under the preview of this levy.

With effect from 01-04-2020, there will two transactions in respect of which equalisation levy shall be charged, namely:

  • Sum received or receivable by a non-resident for the specified services rendered to residents & non-residents having PE in India;
  • Sum received or receivable by a non-resident e-commerce operator from e-commerce supply or services to residents & other specified persons.

Specified Services

  • Equalisation Levy @6% is to be charged from consideration received or receivable for specified services provided by non-residents of India to a resident in India or a non-resident having permanent establishment in India. Persons resident in India providing these services are not subjected to this levy.
  • Further, there are few exceptions wherein equalisation levy would not be applicable even in case of Non Residents:
    • The non-resident has a physical presence /permanent establishment in India and services are connected with such PE.
    • The aggregate amount of consideration does not exceed Rs. 1 lakh per year.
    • Where the payment for the specified services is not for the purposes of carrying out business or profession
  • Equalisation Levy is charged only for specified services. Specified services would include:
    • Online advertisement service;
    • Provision for digital advertising space or;
    • Any other facility or service for the purpose of online advertisement.
  • This levy would be applicable from services rendered after June 1, 2016. The rate of tax under this levy is 6% which is required to be deducted by Resident on gross consideration paid to Non Resident.
  • It is a mandatory levy irrespective of the characterisation of payment i.e. business income, fees for technical service, royalty or any other category of income.
  • Non Resident would not be entitled to claim credit of this tax in its home country, hence this may become an additional cost for them. Once a non-residents income is subjected to Equalisation Levy, such income would not be subjected to TDS or income tax in India.
  • Recipient of service is required to deduct and deposit this tax with the tax authorities in India on or before 7th of next succeeding month. Additionally, an annual return of this levy would be required to be filed after the end of the year on or before the prescribed date viz. 30th June following the FY.

E-commerce supply or services:

  • Equalisation Levy @2% is to be charged from consideration received or receivable by a non-resident e-commerce operator from e-commerce supply of goods or services made or provided or facilitated by it to:
    • a resident in India or;
    • a person who buys such goods or services using IP Address located in India;
    • a non-resident having permanent establishment in India
      1. Sale of advertisement which targets a customer who is resident in India or a customer who accesses the advertisement through internet protocol address located in India; and
      2. Sale of data collected from a person who is resident in India or from a person who uses internet protocol address located in India.
  • There are few exceptions wherein equalisation levy would not be applicable even in case of E-commerce supply or services by non-resident operator:
    • The non-resident has a physical presence /permanent establishment in India and services are connected with such PE.
    • The aggregate amount of consideration/sales/turnover/gross receipts by whatever name called does not exceed Rs. 2 Crores per year.
    • Where the equalisation levy is already leviable under provision of online advertisement services discussed above.
  • The E-commerce operator for the purpose of these provision means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both.
  • Where, the E-commerce supply or services means
    • Online sale of goods owned by operator; or
    • Online sale of services provided by operator; or
    • Online sale of goods or services facilitated by operator; or
    • Any combination of above activities.
  • This levy would be applicable from services rendered after April 1, 2020. The rate of tax under this levy is 2% which is required to be paid by non-resident E-commerce operator & there is no obligation on part of payer to withhold & deposit this levy.
  • Unlike the equalisation levy on online advertisement services which is payable on monthly basis by 7th day of the next month, the equalisation levy in respect of online supply of goods and services shall be paid to the credit of central government on quarterly basis. An annual return of this levy would also be required to be filed after the end of the year on or before the prescribed date viz. 30th June following the FY.
  • An E-commerce is required to deposit this tax with the tax authorities in India on or before following dates prescribed:

Period

Due Date

April to June

7th July

July to September

7th October

October to December

7th January

January to March

31st March

 

  • As this levy is not a part of income tax E-commerce operator also would not be entitled to claim credit of this levy in its home country. Once a non-residents income is subjected to Equalisation Levy, such income would not be subjected to TDS or income tax in India due to the application of Section 10(50) of the Income Tax Act,1961 in which specific exemption from income tax is provided for E-commerce operator on which Equalisation levy is charged.

Exception

India The consideration received for specified services mentioned above or for E-commerce supply shall not includes the consideration which is taxable as royalty of fees for technical services under the Act, read with the relevant DTAA’s. Thus, on the royalty & FTS equalisation levy shall not be applicable & tax would be deducted according to Section 195 of the Act, read with relevant DTAA with those countries.

 

Our Comments:

Since, it was very difficult to tax these online services & e-commerce supply according to income tax provisions due to difficulties in ascertaining the nature of payment for tax purposes, this levy was introduced.

The levy on consideration for specified services @ 6% poses an additional compliance burden on part of Indian entities regarding withholding of levy, depositing it with government, filing of return etc. This may result in additional cost of 6% for Indian entities where foreign service providers are not willing to bear this cost.

There are many non-resident e-commerce operators providing different kinds of goods or services (other than specified services) either by themselves or through its platform in India who does not have any physical presence in India on which equalisation levy @ 2% is now charged on them from 01.04.2020. There is a paramedic shift in this levy from the levy on specified services that the obligation for depositing levy, filing of returns etc. has been now shifted from Indian entities to non-resident operators.

For any query feel free to contact us… Fill the below form. We’d love to reply.