Equalisation Levy Act, 2016

Equalisation Levy Act, 2016

The Equalisation Levy Act, 2016, is a law introduced in India as part of the 2016 Finance Act. It was aimed at taxing the digital economy, specifically targeting online advertising and related services provided by foreign companies to Indian businesses. Below are the full details of the Act:

1. Objective and Scope

The Equalisation Levy was introduced to:

• Tax the growing digital economy.
• Address taxation challenges arising from cross-border online transactions where the service provider is not physically present in India.

2. Who is liable?

The Equalisation Levy is imposed on:

• Non-resident businesses that provide certain specified services to Indian residents or businesses.

Initially, it was primarily targeted at online advertising services, but it has been expanded to cover e-commerce supply and services.

3. Key Definitions

• Equalisation Levy: A tax levied on certain services provided by a non-resident to a person in India.
• Specified Services (2016): Online advertisement, provision of digital advertising space, or any service for the purpose of online advertisement.
• E-commerce Supply or Services (2020): Supply of goods or services through a digital or electronic facility or platform by a non-resident e-commerce operator.

4. Key Provisions

a. Original Levy (2016) – 6% on Advertising Services

• Tax Rate: 6% on the amount paid to the non-resident service provider.
• Applicability:
  • Services provided by non-residents for online advertising.
  • The service receiver (Indian resident or Indian PE of a non-resident) is liable to withhold the levy before making payment to the service provider.
• Threshold: The levy applies if the annual payment to the non-resident exceeds INR 1 lakh in a financial year.

b. Expanded Levy (2020) – 2% on E-commerce Transactions

• Tax Rate: 2% of the gross consideration received or receivable by an e-commerce operator for e-commerce supply or services.
• Applicability:
  • Non-resident e-commerce operators providing goods or services to Indian residents, or selling data collected from Indians.
  • It also applies if services are provided to persons using an Indian IP address.
• Threshold: Equalisation Levy applies only when the annual turnover exceeds INR 2 crore for e-commerce operators.

5. Exemptions

Equalisation Levy is not applicable if:

• The non-resident providing the service has a permanent establishment (PE) in India, and the service provided is effectively connected to that PE.
• The total consideration for specified services does not exceed the prescribed threshold (INR 1 lakh or INR 2 crore, depending on the service).
• The payment is made for services covered under a double taxation avoidance agreement (DTAA), provided that the provisions of the DTAA apply to the non-resident.

6. Payment and Filing Obligations

• For the 6% levy on online advertising: The Indian business making the payment is responsible for deducting the levy at the time of payment and remitting it to the government by the 7th day of the following month.
• For the 2% levy on e-commerce transactions: The e-commerce operator is required to pay the levy on a quarterly basis:
  • April to June: Due by July 7.
  • July to September: Due by October 7.
  • October to December: Due by January 7.
  • January to March: Due by March 31.

Additionally, there is a requirement to file an annual statement by June 30 following the financial year in which the levy was collected.

7. Penalties and Interest

• Interest on delayed payment: If there is a delay in payment of the levy, an interest of 1% per month (or part of the month) is charged on the amount of the delayed payment.
• Penalty for non-compliance:
  • Failure to deduct the levy results in a penalty equal to the amount of the levy.
  • Failure to file the annual statement incurs a penalty of INR 100 per day of default.

8. Administration

The Equalisation Levy is administered by the Income Tax Department of India, but it is considered a separate levy, not an income tax.

9. Amendments and Clarifications

• In 2020, the scope of the Equalisation Levy was expanded to include the 2% levy on e-commerce operators.
• Various clarifications have been issued to define the scope, including:
  • The levy is applicable to B2B as well as B2C transactions.
  • The tax applies even if the transaction involves a combination of goods and services, such as digital platforms.

10. International Reactions

The introduction of the Equalisation Levy has been controversial in international trade circles, particularly for U.S. technology companies, as they are some of the largest digital service providers in India. The U.S. Trade Representative (USTR) has raised concerns about the levy, arguing that it unfairly targets American companies.