Are you familiar with equalisation levy? It’s a part of the Indian Income Tax Act and was introduced in 2016. This new levy aims to tax companies that do not have a permanent establishment in India but offer services in the country. Sounds complex? Well, it basically means that if you’re a foreign company providing a service in India and you earn more than a certain threshold limit, you’re liable to pay this levy.
This move was initiated to curb the erosion of tax base and prevent profits from being shifted to tax havens. The Indian government felt that foreign companies enjoyed all the benefits of the country’s growing economy without contributing to it. This levy was seen as a way to level the playing field for domestic companies that had to pay taxes in India.
Currently, the equalisation levy rate stands at 2% on the amount paid by an Indian resident for online advertisement services. The government has also introduced a 6% equalisation levy on the consideration received by a non-resident taxpayer from an Indian resident for e-commerce supply or services. While it may feel like a burden on foreign companies, this levy is intended to bring in more revenue for India and promote a fair taxation system.
Introduction to Equalisation Levy
Equalisation Levy is a tax levied by the Indian Government on certain types of digital transactions involving non-resident companies. It was introduced with the aim of bringing fairness and equality in tax collection from digital transactions of foreign companies. The Equalisation Levy is governed by the Income Tax Act, 1961, and came into effect from 1st April 2016.
The introduction of Equalisation Levy represents a major shift in the taxation of digital transactions. The rapid growth of digitalisation has led to a significant increase in online transactions between Indian companies and foreign companies. However, due to the absence of a permanent establishment of these foreign companies in India, there was no way to tax these transactions. The Equalisation Levy aims to address this issue and ensure that foreign companies pay their fair share of taxes.
The Equalisation Levy is applicable to specifically identified digital services and transactions, and is not a general tax on all online transactions. The government has identified specific categories of transactions such as online advertising, digital platform services and ecommerce transactions that are subject to the levy. The current rate of the Equalisation Levy is 2% on the consideration received by the non-resident company from Indian residents for the specified services.
Overview of Income Tax Act
The Income Tax Act is a comprehensive statute that governs the taxation system in India. It was first introduced in 1961 and has undergone several amendments since then. This act sets out the provisions for the assessment of income tax, as well as the various deductions and exemptions available to individuals and companies. The act also defines the powers of the tax authorities, the procedures for appeals, and penalties for non-compliance. The act is divided into several sections that cover different aspects of taxation.
Equalisation Levy as Part of Income Tax Act
- The equalisation levy was introduced in India in 2016 as part of the Finance Act of that year. It is a tax on the cross-border digital services provided by non-resident companies, such as Google, Facebook, and Amazon, to Indian customers.
- The levy is applicable on the consideration received by non-resident companies for specified services, which include online advertising, digital advertising space, and any other services as may be notified by the government.
- The levy is charged at a rate of 6% of the consideration and is required to be deducted and paid by the Indian resident who has made the payment to the non-resident company.
Provisions of the Income Tax Act for Equalisation Levy
The provisions of the Income Tax Act for the equalisation levy are contained in Chapter VIII of the act. The chapter defines the scope and applicability of the levy, the persons liable to pay it, and the procedures for collection and assessment of the tax. The chapter also defines the penalties for non-compliance and the appeals process for disputes or grievances.
The Indian resident who has made the payment to the non-resident company is liable to deduct and pay the levy to the government. The levy is to be paid within 7 days from the end of the month in which the consideration was received. Any failure to deduct or pay the levy attracts penalties as prescribed under the act.
| Criteria | Penalty |
|---|---|
| Failure to deduct or pay the levy | 100% of the amount of levy payable |
| Failure to furnish statement of deduction | INR 1000 per day of default |
| Failure to furnish statement of collection | INR 100 per day of default |
The act also provides for appeals against the assessments and orders passed by the tax authorities. Any person aggrieved by an order passed by the tax authorities can appeal to the Commissioner of Income Tax (Appeals) within 30 days from the date of the order. Further appeals can be made to the Income Tax Appellate Tribunal, High Court, and Supreme Court, as the case may be.
Understanding the Relationship between Equalisation Levy and Income Tax Act
Equalisation levy is a type of tax that is levied on certain digital transactions carried out between a non-resident and an Indian resident. It was introduced in India through the Finance Act, 2016 and came into force on 1st June 2016.
In this article, we will discuss the relationship between equalisation levy and the Income Tax Act.
The Relationship between Equalisation Levy and Income Tax Act
- Equalisation levy is not a part of the Income Tax Act. It is a separate tax that is levied on specified transactions related to online advertising and e-commerce.
- Income tax is a tax that is levied on the total income earned by an individual, a Hindu Undivided Family (HUF), a company, or any other entity. It is governed by the Income Tax Act, 1961.
- Equalisation levy and Income tax act are two different taxes that are governed by separate laws and regulations.
Impact of Equalisation Levy on Income Tax Liability
The equalisation levy is not deductible from the income of the non-resident. This means that the Indian resident who makes payment to a non-resident under the specified transactions is required to pay the equalisation levy on the payment made.
The Indian resident who pays the equalisation levy can claim a deduction for this amount while computing their taxable income under the Income Tax Act. However, this deduction is not available for non-residents since they are not taxed on their global income in India.
Specified Services Covered under Equalisation Levy
The specified services that are subject to the equalisation levy include:
| Specified Services | Rate of Equalisation Levy |
|---|---|
| Online advertising | 6% |
| E-commerce supply or services | 2% |
The equalisation levy is applicable only if the aggregate amount of consideration for the specified services exceeds INR 1,00,000 in a financial year.
In conclusion, equalisation levy and Income tax act are two different taxes and governed by separate laws and regulations. The Indian resident who makes payment to a non-resident under specified transactions is required to pay the equalisation levy, which is not deductible for non-residents. However, Indian resident can claim a deduction for this amount while computing their taxable income under Income Tax Act. The specified services that are subject to equalisation levy include online advertising and e-commerce supply or services.
Analysis of the Applicability of Equalisation Levy
The Equalisation Levy is a direct tax that is applicable to all non-resident e-commerce providers that operate in India. The tax was introduced in India through the Finance Act of 2016 and it came into effect from June 1, 2016. The primary objective of this tax is to ensure fair competition between domestic e-commerce providers and foreign e-commerce providers who do not have a physical presence in India.
The tax is levied at the rate of 2% on the gross consideration received by the e-commerce provider for the following services provided in India:
- Online advertising
- Provision of digital advertising space
- Transactions involving the provision of goods or services facilitated by the e-commerce provider
The following points will help in understanding the applicability of the Equalisation Levy:
- The Equalisation Levy is applicable only to non-resident e-commerce providers whose annual revenues from such services in India exceed INR 20 million ($267,547 approx.)
- The tax is levied on the consideration received by the e-commerce provider for such services and not on their profits
- The e-commerce provider is required to pay the Equalisation Levy to the Indian government within 7 days from the end of the month in which the consideration is received
The following table provides a summary of the applicability of the Equalisation Levy:
| Criteria | Applicability |
|---|---|
| Non-resident e-commerce provider | Applicable |
| Annual revenues from specified services in India exceeding INR 20 million ($267,547 approx.) | Applicable |
| Services provided in India | Applicable |
| Rate of tax | 2% on gross consideration |
| Taxable amount | Consideration received for specified services |
| Tax payment timeline | Within 7 days from the end of the month in which the consideration is received |
In summary, the Equalisation Levy is an indirect measure that has been introduced in India to level the playing field for domestic and foreign e-commerce providers. Its applicability is based on several criteria, and non-resident e-commerce providers whose annual revenues from such services in India exceed INR 20 million ($267,547 approx.) are required to pay this tax.
Current Status of Equalisation Levy in India
Equalisation Levy or “Google Tax” was introduced in India in 2016 as an amendment to the Finance Act, 2016. The levy is applied to cross-border digital transactions and companies like Google and Facebook, who earn substantial revenues from India but do not have a permanent establishment here, are liable to pay this tax. The objective of the Equalisation Levy is to tax offshore digital services providers by requiring them to share a portion of their profits with the Indian Government, thereby bringing parity between domestic service providers and international service providers.
- The Equalisation Levy is levied at a rate of 6% on payments exceeding Rs. 1 lakh made by Indian residents or permanent establishments of foreign entities to non-resident digital service providers for specified digital services.
- The specified digital services include online advertising, provision of digital advertising space or any other facility for the purpose of online advertising, and any other service as may be notified by the Central Board of Direct Taxes (CBDT).
- The Equalisation Levy is collected in addition to the income tax payable on such income and is paid by the person making the payment to the non-resident digital service provider.
Despite its introduction, the Equalisation Levy has been surrounded by controversies and challenges. Some experts have pointed out that the levy is not consistent with international tax principles and may discourage foreign investment into India. Also, there has been confusion over whether the Equalisation Levy is inclusive of the Goods and Services Tax (GST) or not. In May 2020, the Indian Government clarified that the Equalisation Levy is not subject to GST, providing clarity to taxpayers and preventing double taxation of the same transaction.
| Year | Applicability |
|---|---|
| 2016 | Equalisation Levy introduced in India |
| 2018 | Equalisation Levy expanded to include non-resident e-commerce companies |
| 2020 | Equalisation Levy clarity issued regarding applicability to GST |
In conclusion, the Equalisation Levy is an important tax measure introduced by the Indian Government to levy taxes on offshore digital service providers. The levy has faced challenges and controversies, but with the recent clarity provided by the Government, it is expected to be applied more effectively and efficiently going forward.
Legal Implications of Equalisation Levy
The Equalisation Levy is a tax that is imposed by the Government of India on certain specified services provided by non-residents to Indian residents. This tax was introduced in the Finance Act of 2016 and has been amended several times since then. The Equalisation Levy is a part of the Income Tax Act, 1961, and its legal implications are significant for both non-residents and Indian residents.
- The Equalisation Levy is applicable to non-residents who provide specified services to Indian residents. The non-residents are required to pay the tax at the rate of 6% on the consideration received for the services rendered.
- The specified services include online advertising, provision of digital advertising space, and any other services as may be notified by the government from time to time.
- The Equalisation Levy is collected by the government and is not subject to any credit or deduction against any other tax liability of the non-resident.
The legal implications of the Equalisation Levy are many:
First, non-residents who provide specified services to Indian residents are required to comply with the provisions of the Income Tax Act, 1961, and file tax returns as per the prescribed formats. Failure to comply with the provisions of the Act can result in penalties and other legal consequences.
Second, the Equalisation Levy is a unilateral tax measure taken by the Indian government. Non-residents may challenge the constitutionality of the levy and its compatibility with international tax treaties. Such challenges can be made in the Indian courts or through international dispute resolution mechanisms.
Third, the Equalisation Levy is an additional tax liability for non-residents who provide specified services to Indian residents. This can increase the compliance costs for non-residents and reduce the attractiveness of India as a destination for investments.
| Pros | Cons |
|---|---|
| Revenue generation for the government | Increased compliance costs for non-residents |
| Level playing field for Indian and foreign companies | Possible violation of international tax treaties |
Despite the legal implications of the Equalisation Levy, the tax has been successful in generating revenue for the government and ensuring a level playing field for Indian and foreign companies. Non-residents who provide specified services to Indian residents should be aware of their tax obligations and comply with the provisions of the Income Tax Act, 1961.
Impact of Equalisation Levy on Business and the Economy
The equalisation levy is a tax that is levied on non-resident service providers who do not have a permanent establishment in India. Introduced in the Finance Act, 2016, it is a countermeasure against the immense digital economic profits that companies were earning from India without being taxed. The tax is applicable on online advertisements, digital platform services, and certain other related services provided by foreign e-commerce companies.
The equalisation levy has a significant impact on businesses and the overall economy. Here are some of the ways it affects them:
- Revenue Collection: The equalisation levy helps the government collect revenue from non-resident companies that provide digital and e-commerce services in India. This tax applies regardless of whether the foreign company has a physical presence in India or not. As more and more businesses move their services online, the revenue collection from the equalisation levy is expected to increase significantly.
- Level Playing Field: The equalisation levy is a way to create a level playing field for Indian businesses against foreign firms that operate in the digital and e-commerce sectors. Foreign companies that operate in India without having a physical establishment were able to avoid paying taxes and thus had an unfair advantage. With the equalisation levy, all companies are subject to the same tax treatment, creating a more balanced and equitable business environment.
- Impact on Small Businesses: The equalisation levy could have a disproportionate impact on small businesses that rely on online advertising or e-commerce platforms to promote their products and services. Such businesses may not have the resources to absorb the additional costs incurred from the tax and may have to pass on the burden to consumers or reduce their online presence.
Equalisation Levy Rates and Impact on the Economy
The equalisation levy is currently set at 2 percent of the consideration received by a foreign e-commerce company for providing specified services to Indian residents. The services that are subject to the equalisation levy include online advertisements, digital platform services, and certain other related services.
The impact of the equalisation levy on the economy is expected to be positive. The tax is likely to increase government revenue, incentivize foreign companies to set up a permanent establishment in India, and promote the growth of domestic e-commerce companies. However, the impact of the tax on the overall economy is still being studied, and its long-term effects remain to be seen. Nonetheless, the equalisation levy is a significant step in creating a more level playing field for all businesses operating in the digital and e-commerce sectors in India.
| Services subject to Equalisation Levy | Equalisation Levy Rate |
|---|---|
| Online advertising | 2% |
| Digital platform services | 2% |
| Specified services related to e-commerce | 2% |
The equalisation levy is an essential tool for the Indian government to regulate the digital and e-commerce sectors. By subjecting foreign e-commerce companies to the same tax treatment as domestic firms, it helps create a more level playing field and promote the growth of Indian businesses. While its impact on small businesses and the overall economy remains to be seen, the equalisation levy is a significant step towards creating a more equitable and sustainable business environment in India.
Is Equalisation Levy Part of Income Tax Act?
1. What is equalisation levy?
Equalisation Levy is a tax introduced in the Finance Act 2016, which was made applicable from 1st June 2016. This is applicable to services provided by a non-resident to an Indian resident or a non-resident having a permanent establishment in India.
2. Is Equalisation Levy part of Income Tax?
Equalisation Levy is a separate tax and is not a part of Income Tax. It is levied on the consideration paid or payable to a non-resident service provider for specified services.
3. Who is liable to pay Equalisation Levy?
The person making payment to a non-resident service provider for the specified service is liable to pay equalisation levy. The liability to pay equalisation levy lies with the service recipient and not with the service provider.
4. What are the specified services under Equalisation Levy?
Equalisation Levy is applicable to specific services such as online advertising, provision of digital advertising space, and any other service as may be notified by the Government.
5. What is the rate of Equalisation Levy?
The rate of Equalisation Levy is 2% of the consideration charged for the specified service.
6. Is there any threshold for Equalisation Levy?
Yes, a threshold of INR 1,00,000 in a financial year is set for the liability to pay Equalisation Levy.
Closing Thoughts
We hope this article has cleared all your doubts regarding whether Equalisation Levy is part of Income Tax Act. Remember that Equalisation Levy is a separate tax that is levied on specified services provided by non-residents. Thank you for reading! Please visit us again for more informative articles.