Equalisation Levy was introduced in 2016. The intention was to bring Business to Business (B2B) digital services, provided by non-residents within the scope of the Indian Tax Laws. This is one of the actions taken by India to tackle BEPS – acronym for Base Erosion & Profit Shifting. Equalisation Levy is categorised as a Direct Tax.
The Central Board of Direct Taxes (CBDT) has notified services (“Specified Services”) on which equalisation levy is applicable. CBDT has the powers to expand this definition and include other services as well.
Currently, there are two “specified services” subject to the levy;
- Online advertisement (e.g. Google AdWords), and
- Digital advertising space or facilities for the purpose of online advertisement.
It is very important to note that Equalisation levy is applicable only when services are provided by a non-resident and are received by
- A person resident in India carrying on any business or profession in India (or)
- A non-resident having a permanent establishment (PE) in India.
Further, the consideration for services should exceed Rs.100,000/- for the financial year.
To summarise, equalisation levy is not applicable when;
- If specified service is provided by a resident, or
- Such service is received by a resident who is not having any business (i.e. when services are for personal use) (or)
- Such service is received by a non-resident who does not have a permanent establishment in India (or)
- Consideration in aggregate for the financial year does not exceed Rs.1,00,000/-
The rate of levy is 6% on the value of services provided. The service recipient should deducted this amount from the payment to be made to the non-resident supplier. The levy so deducted should be deposited within 7th of the subsequent month. Failure to deposit levy within due date attracts interest at 1% per month.
Let us see how to calculate equalisation levy with the help of the following example : XYZ Ltd.uses Facebook to promote its business, Facebook invoices XYZ Ltd. Rs.400,000 on 26-Jan-2019
|Invoice raised by Facebook||4,00,000|
|Equalisation Levy (6% on Rs.4,00,000)||24,000|
Rs.24,000/- deducted in January’19 should be remitted to Government on or before 07-Feb-2019. Payment of Equalisation Levy is similar to that of TDS, but the challan number to be used is “Challan No./ITNS 285”.
Non-deduction or non-payment of levy would also lead to disallowance of expenses at the time of filing tax returns.
The service recipient should also file an annual return by 30th June of next year. Non filing of annual returns within the said due date attracts a penalty of Rs.100 per day during which the failure continues.
Steps to file the return is mentioned below :
- Login to income tax portal – www.incometaxefiling.gov.in
- Click on “e-file” and then on “Income Tax forms”
- Select “Form No.1” from the drop down for “Form Name”
- Select the submission mode from drop down – you have 2 modes of submission, one is “prepare and submit online” and the other is “Upload XML”
- Part A of the form will be auto filled with details of equalisation levy paid in the financial year.
- Part B should be filled manually, this form requires details of the non-resident service provider, list of requirements is mentioned below :
- Name and address
- PAN if available
- Amount of consideration for service provided
- Date of payment/credit of amount of consideration for specified services
- Equalisation levy paid for such transaction
- Interest on late payment of equalisation levy, if any
- Details of penalty, if any
- Equalisation levy paid details such as BSR code, challan serial number, date on which amount was deposited to Government in dd/mm/yyyy format and amount deposited.
Each of the above-mentioned details should be given in separate line items, equalisation levy payment wise and not party wise. In short, the number of entries and number of payments should match. Please do ensure that the total equalisation levy mentioned in “Part A” and those details filled manually in “Part B” match. On completion of the above procedure, kindly proceed to submit the form.
In the real world, no non-resident supplier would be comfortable with the 6% reduction! Further, given that most payments happen online, there is no scope for reduction in the subscription fee. The result is that some large suppliers are raising invoices through their Indian arm, i.e. a resident entity thereby avoiding the levy altogether. Others continue to raise invoices from their foreign offices and push the impact of levy to the Indian recipient. The onus of compliance is completely on the recipient and in most cases, the levy is a cost to the Indian businessman.
On the whole, the idea of Government was to earn its revenue by taxing the non-resident service providers escaping from tax due to non-existence of permanent establishment in India. However, this mechanism has adversely affected the service recipients, as they end up paying the levy amount from their pockets!