Equalisation Levy

The Equalisation Levy, often termed the "Google Tax," was introduced in India in 2016 to tax income accruing to foreign e-commerce companies from Indian digital transactions. This direct tax aims to level the playing field between resident service providers and their non-resident counterparts, ensuring fair competition in the burgeoning digital economy. By taxing business-to-business transactions, the levy addresses challenges posed by new business models that heavily rely on digital and telecommunication networks.

Equalisation levy background and relevance

Over the past decade, India's Information Technology sector has experienced exponential growth, leading to a surge in the supply and procurement of digital services. This expansion has given rise to innovative business models that depend on digital and telecommunication networks, presenting new tax challenges related to nexus, characterization, and valuation of data and user contributions. Traditional tax treaties, based on physical presence, proved inadequate in addressing these challenges. To bridge this gap, the Indian government introduced the Equalisation Levy in the 2016 Budget under the Finance Act 2016, aiming to tax digital transactions and ensure a fair competitive environment for Indian service providers.

Services covered under equalisation levy

The Equalisation Levy applies to specific services provided by non-resident entities to Indian residents or businesses. These services include:

• Online advertisements and digital marketing services – This includes payments made to foreign companies for running online advertisements on digital platforms such as search engines, social media networks, video streaming sites, and websites. It covers services like display ads, sponsored content, pay-per-click (PPC) campaigns, and influencer marketing handled by non-resident entities.
• Provision of digital advertising space and intermediary services – This refers to fees paid for the availability of advertising space on digital platforms, including banner ads, pop-ups, and promotional placements. It also covers services offered by intermediaries, such as ad networks and marketplaces that facilitate ad placements for businesses operating in India.

These specified services are subject to the levy when the annual payment exceeds Rs.1,00,000.

Equalisation levy applicability

The Equalisation Levy is applicable under the following conditions:

• Non-resident service providers: The levy targets payments made to non-resident entities for specified services.
• Business-to-business transactions: It is primarily aimed at business-to-business transactions, where an Indian resident or a non-resident with a permanent establishment in India receives services.

However, the levy does not apply if:

• The non-resident providing the service has a permanent establishment in India, as their income is taxable under existing income tax laws.
• The payment for specified services does not exceed Rs.1,00,000 in a financial year.

Rate of equalisation levy tax

The Equalisation Levy is imposed at different rates based on the nature of the service:

• 6% Levy: Introduced in 2016, this rate applies to payments made to non-residents for specified services like online advertisements.
• 2% Levy: Effective from April 1, 2020, a 2% levy is imposed on the consideration received by non-resident e-commerce operators from e-commerce supply or services provided to Indian residents or entities using an Indian IP address.

It's important to note that these levies are mutually exclusive and are not part of the Income Tax Act but are governed by the Finance Act 2016.

Due dates for compliance

Timely compliance with the Equalisation Levy is crucial to avoid penalties. The due dates are as follows:

Compliance Activity	Due Date
Payment of Equalisation Levy	7th of the month following the month in which the levy is deducted.
Furnishing of Equalisation Levy Statement (Form 1)	On or before 30th June of the financial year immediately following the financial year in which the levy is deducted.

For instance, if the levy is deducted in April, the payment is due by 7th May, and the annual statement for the financial year must be filed by 30th June of the subsequent year. Adhering to these deadlines ensures compliance and helps avoid interest and penalties associated with delayed payments or filings.

Conclusion

The Equalisation Levy is a crucial tax measure ensuring that foreign digital businesses earning revenue from India contribute fairly to the country’s tax system. Initially introduced to cover online advertising services, it was later expanded to include e-commerce transactions, reflecting the rapid growth of the digital economy.

By imposing a levy of 6% on digital advertising payments and 2% on e-commerce revenue, India aims to level the playing field for domestic and international companies. This tax helps curb revenue loss due to tax avoidance by foreign entities operating without a physical presence in India. If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.60% p.a.

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