Insight to Equalisation Levy

Introduction: From 1st June 2016, the Govt. of India has introduced a new tax named, Equalisation Levy (EQL). Also popularly called 'Google Tax'. This article describes the equalisation levy, its implications and procedural aspects.

Background: EQL was introduced in the Union Budget 2016 and is included in the Chapter VIII of the Finance Act 2016. The Govt. had set up a committee on taxation of E-commerce which gave its report in February, 2016. On 27 May 2016, Equalisation Levy Rules, 2016 were notified.

Characteristics:

1. Objective of Equalisation Levy- EQL is intended to be a tax imposed on payments made for specified services to non-residents who enjoy an unfair advantage over their Indian competitors providing similar services, for equalizing their tax burden with other businesses that are subjected to income-tax in India, without disturbing the existing tax treaties.

2. Differences from TDS (Withholding Tax) - Conceptually, EQL may have features that are also shared by the TDS. However, the significant difference, between EQL and TDS would be that the latter, is only a mechanism of collecting tax. If the tax collected by TDS mechanism is more than the tax determined under the Income-tax Act, the taxpayer becomes entitled to a refund, while, if the tax liability is more than TDS, the difference needs to be paid by the tax payer. On the contrary EQL would be determined with reference to the gross amount of the payment and the rate of Equalisation Levy applicable on it, which would be a full and final tax.

3. Tax Treaties not Applicable - EQL is applicable irrespective of whether any income arising from the transaction is taxable in India or not. It does not fall within the scope of 'income-tax' or 'tax on income' or 'any identical or substantially similar taxes', which typically define the scope of taxes covered within the tax treaties.

4. Specific exemption from Income Tax Act - Section 10(50) of Income Tax Act states that once revenue is chargeable to EQL under chapter VIII of Finance Act, it is exempted from income tax.

Applicability: From 1 June 2016, EQL shall apply to consideration received or receivable for specified services provided by all those non-resident entities that do not have any permanent establishment (P.E) in India.

Specified Services: Any sum paid or payable or credited as a consideration for any of the following:

• digital advertising space or
• any other facility or service for the purpose of online advertisement and
• any other service as may be notified by the Central Government in this behalf

Rate of tax: EQL at the rate of six per cent of the amount of consideration for any specified service received/receivable.

Threshold: Threshold limit has been set as Rs. 1 Lac. It means if the specified services received by the service receiver is above Rs.1 lac during the year from the non-resident company, then EQL would be levied.

Exemptions: EQL shall not be charged where:

• The non-resident providing specified services has a P.E in India and such services are effectively connected with that P.E.
• The aggregate amount of consideration in a previous year does not exceed Rs.1 lac
• Where the specified services received are not for purposes of business or profession.

Effectively, only B2B transactions come under its purview. If the service recipient company registered in Jammu & Kashmir, then EQL is not applicable on such company, as this chapter is not applicable to Jammu & Kashmir.

Administration: Equalisation Levy is administered by the Income-tax department.

Compliance procedure:

Deduction and payment:

• Every service receiver (assessee) other than those specifically exempted (see exemption as mentioned above) shall deduct the EQL from the amount paid/payable. It will be deductible at source, in similar way as withholding tax.
• The amount so deducted during the month shall be paid by seventh of immediately following month through EQL challan (ITNS 285).

Return filing:

• Annual return is required to be furnished electronically in Form No.1 on or before 30th June immediately following that financial year.
• Where any levy, interest or penalty is payable under EQL provision, a notice of demand specified in Form No.2 shall be served upon the taxpayer.
• Interest for delayed payment- Simple Interest @1% for delayed payment of EQL for every month or part of the month by which such credit of the tax or any part of tax delayed.

Penalty for failure to deduct or pay EQL:

• In case the service receiver fails to deduct EQL from the service provider- In addition to levy or interest, if any, a penalty equal to amount to EQL that he failed to deduct.
• EQL deducted, fails to pay such levy - In addition to paying that levy and interest thereon, a penalty of Rs. 1,000 for every day during which the failure continue, however penalty shall not exceed the EQL itself.
• Further, disallowance of expense u/s 40(a)(ib), if EQL is not deducted on the consideration which is deductible as per the provisions of Finance Act 2016.

Penalty for failure to furnish Form-1- If assessee failed to furnish the EQL statement within the prescribed time, he has to pay penalty 100 Rs. Per day till the default continues.

Filing of appeals-

• The assessee can file appeal against the penalty order with Commissioner of Income Tax (Appeals) in Form -3 within 30 days from the receipt of the penalty order.
• The assessee can file appeal against the order of CIT (A) with Appellate Tribunal in Form-4 within 60days from the receipt of the order from CIT (A).

No grossing up - There are instances where non-resident insists that they will not bear the  tax burden, in case of TDS deduction, the assessee is required to deduct tax after grossing up the payment, thereby further increasing the tax burden. But in case of EQL, if the assessee does not deduct EQL then he does not have to gross up the amount of payment. For e.g.- If TDS rate is 10% and amount paid is Rs.1,00,000 without deduction of TDS, then TDS will be payable on  grossed up amount i.e.  Rs.1,00,000/90*100=110000. While EQL will be payable on Rs.1,00,000 without grossing up.

Whether to deduct TDS or EQL?

When an Indian makes payment to non-resident, he has to decide whether he should deduct TDS or EQL. He has to examine whether the services are covered under specified services or not? If yes, then deduct EQL. If not, then TDS.

Disclaimer: This article is provided for information purposes only it could not be considered as legal or financial advice.