Equalizing the playing field - Equalization Levy
With the increase in globalization and the rise of cross border trade and commerce, various companies have innovated new ways to facilitate sales. The world is seeing a huge onset of internet and the number of people getting access to internet is increasing manifold.
With the advancement of technology, many goods that were earlier delivered in physical form are now sold over the internet. Many businesses, in an attempt to promote their product and services are increasingly using advertisement.
Many times, advertisement is also done in foreign countries. A mixture of these concepts has given rise to the world of online trade and digital advertisement.
The Government of India, in line with BEPS Action Plan 1, introduced the concept of Equalization Levy (“EL”). Equalization Levy is a type of tax that is applicable to non-residents who are:
providing online advertising or digital space (referred to as “Advertisement related Equalization Levy”), and
selling goods or providing services over the e-commerce route (referred to as “E-Commerce Operator related Equalization Levy”).
The fundamental condition for applicability of EL is that the non-resident does not have a permanent establishment (referred to as “business presence”) in India but earns through sales or services or advertisement in India.
Permanent establishment is a legal phrase. For easy understanding, permanent establishment means business presence in another country. It is the fundamental objective and reason for introduction of equalization levy. Under tax treaty, a non-resident person is not liable to pay tax on its business profits if it does not have a permanent establishment in the other country. The Government aims to earn tax revenues of non-residents who are earning income without having to pay tax in India. The permanent establishment (i.e. business presence) could be through a physical place of business (such as branch office, representative office, factory, etc.), sending employees to the other country or appointing exclusive agents in the other country.
Advertisement - Equalization Levy
What is Advertisement related Equalization Levy? When does Equalization levy apply?
It is applicable for online advertising or providing digital space provided by a non-resident to any person carrying on business or profession in India (including a non-resident having a business presence in India).
When is it applicable, what is the rate, is there any threshold for applicability?
The service recipient shall deduct tax @ 6%, if the total consideration during the financial year is more than INR 1 lakh (Approx. USD 1,400/-) per annum.
The fundamental point to be kept in mind is that the recipient of services (i.e. the payer) is using the advertisement services for its business or profession. (i.e. personal advertisement is not covered).
Due date for payment of Equalization Levy
The payment is due on the 7th of every month.
Equalization levy deducted in January is payable on 7 February
Equalization levy deducted in February is payable on 7 March
and so on
Failure or delay in payment of EL shall attract interest and penalty.
E-commerce Operator - Equalization Levy
What is e-commerce related Equalization Levy? When does Equalization levy apply?
The Finance Act, 2020 brought the second set of provisions for equalization levy, which would apply to e-commerce operators providing e-commerce supply or service.
E-commerce supply or service means the online sale of goods, online provision of services or both or any combination thereof. The scope of e-commerce was further increased to include activities such as acceptance of offer for sale, placing of purchase order, acceptance of purchase order, payment of consideration or supply of goods or provision for services.
This tax would be applicable to every e-commerce operator (i.e. a non-resident who sells goods or provides services through the internet to persons in India), if the e-commerce operator does not have a business presence in India.
When is it applicable, what is the rate, is there any threshold for applicability ?
E-commerce operators are required to pay Equalization Levy @ 2% on the amount of sales consideration (unlike the EL on advertisement where the EL is deducted and deposited by the service recipient).
The e-commerce operator is required to pay EL only if the annual sales exceeds INR 2 crores (Approx. USD 2,70,000) per financial year.
Note: If the services provided are covered under advertisement related equalization levy (taxable @ 6%), this tax @ 2% shall not apply.
Due date for payment of Equalization Levy
The payment is on quarterly basis. The due date for depositing the amount of EL is:
Q1 - 7 July
Q2 - 7 October
Q3 - 7 January
Q4 - 31 March
Note: Q1 refers to the period from 1 April to 30 June and so on.
Note that for the last quarter, payment is due by the end of the financial year itself.
Some interesting observations
Equalization Levy is levied under the Finance Act and not Income-tax Act, 1961. EL is not a tax as per the Income-tax Act, 1961. Hence, no credit or benefit can be availed under the Double Taxation Avoidance Agreement (DTAA)
Failure to deduct Equalization Levy from the payment made to online advertiser will be disallowed under the Income-tax Act, 1961
The definition of E-commerce is very wide and covers all sale of goods and provision of services by non-residents. An analysis has be made on a case to case basis considering the specific facts.
In light of the recent decision of the Hon’ble Supreme Court of India in the case of Engineering Analysis Centre of Excellence Pvt Ltd held that sale of off the shelf packaged software is not royalty. A case can be made that the consideration is liable for Equalization Levy.
Not sure about the Equalization Levy applicability in your case? Feel free to reach out to us. Our team of experts will be happy to help!