Equalization Levy_India_Tax on Advertisement Payments outside India

Posted by CA Pankaj Kumar Vats
On 22 Apr 2020

Summary

Equalization levy was introduced in the year 2016 by the Indian Govt to tax the payments made outside India for Advertisement and allied services. The prescribed tax rate was 6%. The Finance Act 2020 widened the scope of equalization levy by covering Non-Resident e-commerce operator to pay tax @ 2%.

Equalization levy can be divided into two parts

Part 1 Equalization Levy @ 6% (Brought by Finance Act, 2016)

Section 165 of Finance Act, 2016 introduced Equalization Levy

The Equalization Levy has to be charged @ 6% of the amount of consideration for any specified service received or receivable by a person, being a non-resident from the Specified Person.

Specified Person, who are liable to Pay Equalization Levy:

  • A person resident in India and carrying on business or profession; or
  • A non-resident having a permanent establishment in India 

Specified Services that are considered for equalization levy:

“Specified Service” means an online advertisement, any provision for digital advertising space or any other facility or service for online advertisement and includes any other service as may be notified by the Central Government in this behalf”

The Equalization levy shall not be charged in the following cases:

  • The Non-Resident providing the specified services has a permanent establishment in India and the specified services are effectively connected with such permanent establishment
  • The aggregate amount of consideration for specified services does not exceeds Rs. 1,00,000
  • If the payment is not made for business purpose

Compliance

  • The equalization levy has to be deducted from the payment to be made to Non-resident. The deduction so made has to be paid to the Govt on or before the 7th day of the next month
  • Form 1 has to be filed annually on or before the 30th of June
  • In case of delay in Payment, simple interest @ 1% per month or part of the month has to be paid.
  • In case of failure to deduct the equalization levy, the assessee has to pay equalization levy, simple interest @ 1% per month or part of the month, and a penalty equal to the amount of equalization levy.

Part 2 (Brought by Finance Act, 2020)

It has been a challenging task for the Indian Govt to have an ideal tax strategy for the digital transaction going on. In digital transactions, what is happening is that lot of e-commerce operators are Non-resident in India and thus not paying any tax in India but collecting the money from India via digital platforms. To bring such transactions in the ambit of tax, the Indian Govt expanded the scope of equalization levy to coverup such transactions.

Finance Act, 2020 has introduced Section 165A in the Income Tax Act to enhance the scope of Equalisation levy. E-commerce supplies made by Specified E-Commerce Operators, of goods and services made on or after 1st April 2020 will now be covered here.

Equalization Levy on E-commerce Operator: 2% of the sum received or receivable 

Specified E-commerce Operator

E-commerce operator means a Non-Resident who owns, operates, or manage the digital or electronic facility or is the platform for online sale goods or services.

Who has to pay the Equalization Levy @ 2%

The Specified E-Commerce Operator has the responsibility to pay the equalization levy.

Compliance

The equalization levy needed to be paid quarterly basis by 7th of the month falling after quarter except for March (where the due date is 31st March itself)

The Equalization levy shall not be charged in the following cases:

The turnover of the e-commerce operator from the e-commerce supply is less than INR 2 crores

Example:

Netflix (we are assuming it as Non-Resident, not having any Permanent Establishment in India), an e-commerce operator, providing online subscriptions for digital content. It collects money towards subscription.
Let’s say, Mr. Ram buys a subscription and makes the payment of Rs. 700 to Netflix. Now in such a case it the duty of Netflix to pay the equalization levy @ 2% on the amount of Rs. 700. Thus Netflix has to pay Rs. 14 towards equalization levy to the Indian Govt.

Unique features of Equalisation levy:

  • It is a special levy and not Income tax that is why credit of the same is not available against any income tax liability.
  • Since it is a special levy, treaty benefit (eligible under double taxation avoidance agreement) is also not available.

Key takeaway: The first part of equalization levy (of 6% of the gross amount) is to be deduced by Indian payer while making payment to a non-resident for online advertisement services, however, on the other hand, the second part of equalization levy of 2% (which is applicable on other than advertisement services covered in the first part) is to be paid by Non-resident E-commerce operator on gross amount received by it. 

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