Equalization Levy Note
Globalization and expansion of Information Technology has increased the supply and procurement of digital services which had laid a significant impact on a country’s corporate income tax regimes. Profit base gets effectively eroded from the country of consumption due to inadequacy of physical presence. Considering the same, Organisation of Economic Co-operation and Development (‘OECD’) came up with the Base Erosion and Profit Sharing (‘BEPS’) Action Plans, which aim to ensure coherence, transparency, and substance. In congruence with BEPS Action Plan 1, India introduced Equalization levy (EL) in the year 2016 as a convenient option to tax digital transactions without having the need to amend tax treaties.
The relevant provision states that equalization levy shall be applicable at 6%, which shall be withheld at the time of payment by the service recipient. However, equalisation levy shall be applicable only where the following are satisfied:
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Payment is made to Non-Resident (‘NR’) not having a Permanent Establishment (‘PE’) in India.
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Payment is made for specified services i.e. online advertisements, provision for digital advertising space and related facilities.
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Payment is made by a person resident in India for the purpose of carrying on business or profession or by NR having a PE in India provided that the payment made exceeds INR 1 00,000.
Notably equalisation levy is not a part of domestic income tax law and is also beyond tax treaty provision, companies may not get credit for it in their residence country or favourable treaty benefits.
In the year 2020, scope of EL has been broadened to include e-commerce operators. The rate of equalisation levy is 2% chargeable on the amount of consideration received for e-commerce supply or services provided by an e-commerce operator. The following conditions are required to be satisfied for such levy:
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Payment is made to NR e-commerce operator, provided his gross receipts are greater than or equal to INR 20 million and such services are not effectively connected to NR’s PE in India.
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Payment is made for providing online sale of goods or provision of services or both by the non-resident e-commerce operator.
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Payment is made by a person resident in India or a non-resident in respect of sale of advertisements targeted at persons resident in India or using IP address in India.
Further, it worth noting that any income subject to equalization levy shall not be included in the total income of the recipient. Hence, the non-resident service provider/e-commerce operator's income shall not be subject to further tax in India.
Every person liable to equalization levy shall be required to obtain tax registration in India. The amount deducted as equalisation levy shall be deposited to the credit of Government within the time prescribed. In case of 6% EL, the amount is required to be deposited on the 7th day of the calendar month following the month in which payment has been made. In case of 2% EL for-e-commerce operator, the amount is required to be deposited on 7th day from the end of the respective quarter during which the payment was made and 31st March for the last quarter.
The foreign service provider shall furnish an annual return in prescribed form on or before 30th June after the end of Financial year, in respect of all specified services. In case a person does not comply with EL, he shall face consequences of failure to discharge EL. These shall include:
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Interest at 1% per month (or part of month) for which the credit of the whole/part of tax is delayed
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Penalty equal to 100% of the EL for non-deduction of such EL
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Penalty of INR 1000 for every day for which EL is not deposited to Government; and
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Prosecution in case of furnishing false statement.
The EL is reasonably expected to be accompanied with other congruent tax reforms along with BEPS Action Plans, in the future to effectively achieve the ultimate objective of tax benefit of streamlined taxation in dynamic digital economies.
However, recently US has launched a probe into digital services taxes under section 301 of the 1974 Trade Act which was ensued due to expansion of scope of EL by imposing 2% levy on payments made by suppliers to e-commerce portals.
Such initiative has been adopted as the US government is concerned that many of their trading partners has been adopting tax schemes designed to unfairly target their companies. As things go, they are prepared to take all appropriate action to defend their businesses and workers against any such discrimination.
Apropos to the above, Indian government would defend its decision to widen a tax on digital services to include e-commerce in its scope and does not intends to change its standpoint as it is steadily working on its implementation.