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Globalization, coupled with digitalization, is continuously transforming the world as we know it. We are currently looking at the Knowledge Era, where computerization and data are the buzzwords. Such transformations have changed the way trade and businesses function. The omnipresent Internet has facilitated an increase in the demand and supply of digital services, with more and more businesses taking the e-commerce route. In 2016, the total worth of the global digital economy was estimated to be $11.5 trillion. India's digital economy alone generates about $200 billion of economic value annually.

Tech giants and e-commerce companies have managed to grow exponentially by generating revenue from outside the country of residence, while not having to pay tax in the destination countries. The changing dynamics have forced governments across to re-look into their taxation policies. This is because digitization has blurred the link between income-producing activity and location; there is a new tax challenge in terms of nexus, characterization, valuation of data, and user contribution. Until 2016, such companies managed not to pay their taxes as the performance of services was not executed in India. Meanwhile, foreign entities with permanent establishments are taxed at a rate of 40%. It is to tackle these problems and to tax digitized businesses that the government has introduced an equalization levy.

An analysis on Equalisation Levy

History of Equalization Levy

Equalization levy can be traced back to OECD and G-20 BEPS (Base Erosion and Point Shifting) Action 1. BEPS Action 1 proposed three interim options to address the taxation issues of the digital economy-

  • Significant economic presence
  • Withholding tax on digital transactions
  • Equalization levy

Taking a cue from this, in 2016, India became the first country to introduce an Equalization Levy.

Equalization Levy 1.0

Introduced in 2016, Equalization Levy 1.0 is applicable at the rate of 6% on gross considerations to be paid to a non-resident service provider in return for certain specified services. Currently, these services include-

a) Online advertising services

b) Any provision for digital advertising space or any other facility or service for online advertisement

c) Any such service that may be notified by the central government

Such a service provider should not have a permanent establishment in India and should earn income from-

a) a person resident in India and carrying on business or profession

b) a non-resident having a permanent establishment in India.

The levy is only applicable if the payment made to the non-resident exceeds INR 1 lakh in a financial year and covers only B2B transactions.

It is to be noted that the payer is required to withhold the applicable equalization levy from the amount payable to the non-resident service provider.

For example, Miss X has availed certain business promotion services from Google, worth INR 5 lakh. As per the provisions of section 165 of Income Tax Act, 1961, Miss X is liable to deduct an equalization levy @6% on INR 5,00,000, i.e., INR 30,000. The remaining amount of INR 4,70,00 is to be paid to Google.

 

When is Equalisation Levy not applicable?

Under sub-section (1) of Section 165 of the Income Tax Act 1961, equalization levy is not charged where—

a) The non-resident providing the specified service has a permanent establishment in India, and the specified service is effectively connected with such permanent establishment

b) The aggregate amount of consideration received or receivable in a previous year by the non-resident from an India resident who is carrying on business or profession, or from a non-resident having a permanent establishment in India, does not exceed INR 1 lakh

c) The payment for the specified service by the person resident in India or the permanent establishment in India is not for the purpose of carrying out business or profession.

Due Date Compliance

The equalization levy deducted during any calendar month is to be paid by the assessee to the Central Government by the seventh day of the month immediately following the said calendar month. For instance, Miss X made the payment after deducting the equalization levy on 10th January. Now, she is liable to deposit the tax with the authorities by 7th February.

The due date of furnishing the Equalisation Levy Statement (Form-1) is on or before 30th June of the Financial Year. This is the annual statement.

The penalty due to non-compliance

Situation

Penalty

Delayed payment

Interest is charged at 1% of the outstanding levy for every month, or part thereof is delayed

Equalization levy not deducted wholly or partially

Equal to the amount of equalization levy failed to be deducted

Equalization levy deducted but not deposited with the government

A penalty of INR 1000 for each day of default (not to exceed the amount of equalization levy)

Failure in furnishing statement of compliance

INR 100/day of default

Filing of a false statement

Imprisonment up to a term of 3 years and a fine

Equalization Levy 2.0

The Finance Act 2020 has expanded the scope of equalization levy by introducing a new provision - Section 165A in the Finance Act, 2016. Through this, an equalization levy has been extended to non-resident e-commerce operators supplying goods and services online. This levy is effective from April 1, 2020. It covers both B2B and B2C transactions. In Equalization Levy 1.0, the compliance is required to be carried out by the payer, whereas in Equalization Levy 2.0, the compliance is to be done by the non-resident e-commerce operator.

Eligibility-

Equalization levy at the rate of 2% is applicable on the amount of consideration received by an e-commerce operator* from e-commerce supply or services** made or provided or facilitated by it to:

a) to a person resident in India; or

b) to a non-resident when-

  • sale of advertisement which targets a customer who is residing in India or a customer who accesses the advertisement through internet protocol (IP) address located in India
  • sale of data collected from a person who is resident in India or from a person who uses an IP address located in India

c) to a person who buys such goods or services using an IP address located in India.

*An e-commerce operator is a non-resident who owns, operates, or manages a digital or electronic facility or platform for the online sale of goods or online provision of services or both.

**e-commerce supply or services means—

  • online sale of goods owned by the e-commerce operator
  • online provision of services provided by the e-commerce operator
  • online sale of goods or provision of services or both, facilitated by the e-commerce operator
  • any combination of activities listed in the above pointers.

When is Equalisation Levy not applicable?

The equalization levy shall not be charged

a) Where the e-commerce operator making or providing or facilitating e-commerce supply or services has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment

b) Where the equalization levy is leviable under section 165

c) Sales, turnover, or gross receipts of the e-commerce operator from the e-commerce supply or services made or provided or facilitated is less than 2 crore rupees during the previous year.

Due Date Compliance

The equalization levy is to be paid by every e-commerce operator to the credit of the government on a quarterly basis within the following due dates:

Quarter Ending On

Due Date

30th June

7th July

30th September

7th October

31st December

7th January

31st March

31st March

The penalty due to non-compliance

The non-resident e-commerce operator is required to file an annual statement on or before June 30 of the relevant financial year. If an e-commerce operator fails to file the yearly statement within the specified date, an additional penalty of INR 100 per day of continuing default may be levied.

Suppose the e-commerce operator delays the payment of the equalization levy or part thereof, in that case, simple interest at the rate of 1% of the outstanding levy for the period by which such crediting of the tax is delayed will be charged.

If the assessee fails to deduct the equalization levy (wholly or partially), then a penalty equal to the amount of equalization levy that he failed to pay will be charged.

 

Analysis of Equalization Levy

a) The e-commerce market is expected to grow to $200 billion by 2026. Have a tax mechanism in place will help boost the country’s tax revenues.

b) EL creates a level playing field. It ensures that companies earning revenue from Indian audiences will not evade being taxed by shifting their base to tax havens. EL also tends to equalize the income tax disadvantage faced by Indian digital companies and enable them to compete with foreign players without having to locate outside India.

c) The amendment brought in via the Finance Act 2020 has widened EL’s scope such that almost all kinds of online transactions are covered under it. Stakeholders have demanded more clarity as to what transactions can be taxed. For example, if a service is booked online but is provided offline, will such transactions come under the purview of EL too?

d) There are chances of tensions arising with countries that house tech giants over the issue of EL. For instance, the United States has initiated an investigation into India’s equalization levy.

e) There are concerns over the operators passing on the tax burden to end-users. Indian startups have requested for cancellation or reduction in the equalization levy on the advertising revenue. This is because the burden is often borne by Indian startups who advertise on these platforms.


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Category Income Tax, Other Articles by - Shweta 



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