Equalisation levy/Disallowance u/s 40 (a)(ib) of the Income Tax Act

History:

Equalisation Levy was introduced in India in 2016, with the intention of taxing the digital transactions i.e. the income accruing to foreign e-commerce companies from India. It is aimed at taxing business to business transactions.

Purpose of Equalisation levy:

We already have relevant income tax provisions for deducting tds on several payments made such as brokerage, royalty, commission, fees for prof/tech services, payments to contractor/subcontractors.

However growing digitalisation & increasing dependence on foreign tech/foreign media made the government frame rules in this regard so as to tax the income arising to such foreign players.

The rationale for the equalisation levy was to create a level playing field by making multinational digital entities without a permanent establishment in the country liable to pay tax in India.   

What does it say:

Equalisation Levy is a direct tax, which is withheld at the time of payment by the service recipient. The two conditions to be met to be liable to equalisation levy:

• The payment should be made to a non-resident service provider;
• The annual payment made to one service provider exceeds Rs. 1,00,000 in one financial year.

Coverage:

• Online advertisement;
• Any provision for digital advertising space or facilities/ service for the purpose of online advertisement;

How much:

Currently, the applicable rate of tax is 6% of the gross consideration to be paid. 

Example:

Rohan has advertised on Facebook to expand his business. He has to pay Rs. 2,00,000 in FY 2017-18 to Facebook for the advertising services availed.

Solution:

Facebook will bill Rohan for an amount of Rs. 2,12,765.9

Rohan will deduct TDS at the rate of 6% of Rs. 2,12,765.9 = Rs. 12,765.9 and pay the balance of Rs. 2,00,000 ( Rs. 2,12,765.9 - Rs. 12,765.9) to Facebook.

Consequences of non-compliance:

Penalty+100% of the expenditure would be disallowed on which tax has not been deducted or after deduction has not been deposited.