Understanding the Equalisation Levy Tax for Non-resident Firms

Last Updated at: Oct 30, 2020
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Levy Tax

Equalisation Levy Tax For Non-Resident Firms

Finance Act 2020 imposed an equalisation levy at 2% on the non-resident e-commerce operators. The new levy has expanded the existing scope by including the consideration received by e-commerce operators on the transactions.

 

Waiting for an ad to end or pressing the skip button on YouTube or Instagram has become an instantaneous reflex action for us. Advertisements online have boomed due to massive improvements in information technology. As a result businesses, their digital content has transformed, necessitating a change in Taxation policy. The Equalisation levy was introduced in the year 2016 to tax the digital transactions of non-resident service providers. Many of the non-resident companies generate huge revenues from offering advertisement services in India. They also benefit primarily because of the wide user base in India. In this post, we assess the legislative, taxation and business impacts of the equalisation levy tax. 

Nature and Need of Equalisation Levy – India and the world 

The international scenario 

  • Not long ago, Google, Facebook and Apple protesting against what terms as the “Gafa” tax levied by France. France thus became the first country to levy taxes on these massive digital companies. It imposes a 3% tax on annual revenues generated by the French user base.
  •  The Organisation for Economic Cooperation and Development, also came out with a detailed Base Erosion Profit Sharing scheme last year to bring transparency in the taxation of multinational companies. 

Physical presence for taxing multinational companies

As per current rules of the OECD a country would be able to tax a multinational company only if a nexus has establishment through a physical presence in the country, known as a permanent establishment and the only the profits trace to such a permanent establishment in the country are taxed. Keeping this in mind, the government has imposed the liability to deposit the tax on the Indian company receiving such advertising services. 

The Indian scenario 

  • India constitutes one of the largest user bases for many digital companies.
  • India now stands only next to China, as the world’s second-largest internet user base. This creates a massive opportunity for business vying for sales through online advertisement leads. 
  • Thus, the government sees a fair opportunity to tax large companies, often based outside India, that derive profits from Indian users.
  •  Additionally, the government places the responsibility of such a tax on the Indian company that makes use of such advertising services of an international company. 

Scope of services on which Equalization levy needs to be paid

The government has restricted the scope of Equalisation levy to cover only online advertisements. It also includes companies that provide a provision for digital advertising spaces for the purpose of online advertisement. Thus, only those companies that provide advertorial services in India would be liable to pay this tax. 

Who needs to pay the Equalization levy to the tax department?

Service recipient – The general rule for most taxes places an onus to deposit tax on the service provider or the entity generating revenue. However, in the case of equalisation levy, payment needs to be made by the service recipient. This payment needs to complete the paying company that uses the service. 

The following two conditions are essential

  • Payment must be made to non – resident service provider 
  • The annual payment made to one service provider must exceed ₹1 lac in a financial year 

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What is the amount of payment of the equalization levy?

The applicable rate is 6% of the gross consideration to be paid. Thus, if the total invoice amounts to ₹1,50,000, an amount of ₹9,000 will have to deductions from the final amount and paid to the tax department. 

Due dates and penalties for late payment of the equalization levy

The due date for depositing the amount of equalization levy is 30th June, for the services availed in the previous financial year. If service recipient has not deposited this amount by the due date, the following penalties become applicable – 

  • For delay in payment – Interest at 1@ of outstanding levy 
  • If equalization levy has not a deduction – Penalty is equivalent to the amount that should’ve been deduction. 
  • Equalization levy collected but not deposited – Penalty up to ₹1000 per day, subject to the overall amount of levy 
  • The payment may also be disallowed to be claimed as a deduction under business expenditure 
  • False statement – Penalty includes payment of fine as well as imprisonment for a term of up to 3 years 

Common FAQs for payment of equalization levy

1. If I pay more than ₹1 lac for advertising to multiple advertising entities, should I deduct payment for equalization levy? 

The rule for applicability of equalization levy is that the payment to each business entity must exceed ₹1 lac. Thus, if you’ve paid an amount exceeding ₹1 lac, but to various entities, where no company received more than ₹1 lac, the tax is not payable. 

2. How can I manage my equalization levy to have the minimum possible tax outcome?

It is also important to note the period during which the payments have been made. If the payments within one financial year (April 1 – March 31) do not total to ₹1 lac, no tax is payable. Thus, as a business entity receiving such services, you may enter into an arrangement of staggered payments. Spreading your payments over two financial years, such as in March and April can help you minimise the overall equalisation levy. 

 

Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.