Understanding Equalisation Levy: Taxing Non-Resident Online Payments

Last Updated : Sept. 18, 2023, 11:55 a.m.

Have you heard of the term Equalisation Levy? It is a direct tax imposed on online transactions or payments made to non-residents for furnishing certain services to someone in India. It was introduced in 2016 in India to tax digital transactions, i.e., the income accruing to international e-commerce companies operating in India. It aims to tax business-to-business transactions. The levy is 6% of the amount business organisations receive. It should be submitted to the government within seven days before the month’s end. The Government of India introduced the Equalisation Levy Income Tax to assist Indian service providers to compete with international service providers and furnish fair competition. Keep reading the article to learn more about the Equalisation Levy.

Background and Relevance Equalisation Levy

The Information Technology sector has massively grown over the last decade, and the demand and supply of digital services have tremendously grown. The growth and expansion of the Information Technology industry resulted in new business models relying on digital communication networks. New business models are encountering challenges related to tax payments regarding data characterisation and protection and require a new tax system. Considering this, the Ministry of Finance in India introduced the Equalisation Levy in the 2016 Budget under the 2016 Finance Act.

Characteristics of the Equalisation Levy

The features of the Equalisation Levy are as follows:-

• Digital commerce transactions pay the Equalisation Levy without regard to national borders.
• Certain services refer to online advertisements, digital marketing, or other services utilised for online advertising.
• The Equalisation Levy Income Tax isn’t applicable if the overall consideration amount doesn’t exceed one lakh Indian rupees during a year.
• The 6% Equalisation Levy is the consideration value for certain services received or owed from someone who doesn’t reside in India and has no permanent establishment in the country, from an Indian resident engaged in business activities, or from a non-resident with a permanent business establishment in India.

Equalisation Levy under the Finance Act 2016 Applicability

The Equalisation Levy is withheld at the payment time by the service recipient. You should meet the following requirements to be eligible for the Equalisation Levy Income Tax:-

• The payment must be made to a service provider who doesn’t reside in India.
• The yearly payment to a service provider exceeds one lakh Indian rupees for a financial year.
• It applies to only specific digital services, such as e-commerce, digital marketing, online services, etc.

Non-Applicability of the Equalisation Levy under the Finance Act 2016

The Equalisation Levy Income Tax isn’t applicable under the following conditions:-

• When a service provider is not residing in India, or an e-commerce operator has a permanent business establishment in India, its provided digital services are associated with that permanent establishment
• When the e-commerce operator’s yearly turnover from the e-commerce supply or services is below two crore Indian rupees during the preceding year
• When digital services aren’t covered in the provisions specified under the Equalisation Levy Section 165 of the 2016 Finance Act.

Specified Services Under Equalisation Levy

The prescribed services under the Equalisation Levy Income Tax are as follows:-

• Online Advertisement
• Furnishing digital advertising spaces or other facilities for advertising online
• Any other service that the government at the central level may notify.

Tax Rate Under the Equalisation Levy

The Government of India launched the Equalisation Levy Income Tax under the 2016 Finance Act to launch electronic transactions. As per Section 165 of the 2016 Finance Act, an individual who is an Indian resident and non-resident with an established permanent residence in the country must deduct an Equalisation Levy at a 6% rate of the amount that non-residents pay to buy certain online services.

The Equalisation Levy has to be deducted when the overall consideration amount for certain services by people not residing in India exceeds one lakh Indian rupees. The payment’s purpose is to fulfil professional or business activities.

Consequences of Paying the Equalisation Levy Late

The consequences of paying the Equalisation Levy are as follows:-

• If you miss paying for depositing the tax late, a monthly interest at a 1% rate would be charged on the unpaid amount.
• If you miss deducting the tax within the due date, the penalty amount will equal the unpaid Equalisation Levy Income Tax.
• If the tax amount is deducted but not deposited, a penalty of around Rs.1000 daily shall be charged until the default continues.
• If you miss paying the amount within the specified deadline, you will be penalised by Rs.100 daily until the default persists.

Conclusion

The new Equalisation Levy doesn’t apply to transactions already covered under the old one, i.e. in the 2016 Finance Act. However, it doesn’t apply to online advertising or the digital space provision. It applies to non-residents operating in the e-commerce industry who are Indian residents and consumers who have their Indian IP address. There were proposed modifications that came into effect on 1 April 2020. They appear to be quite extensive in scope and have a wide-ranging effect. The Equalisation Levy Income Tax benchmark is set at two crore Indian rupees instead of one lakh Indian rupees, the benchmark for the Equalisation Levy in 2016.

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