Equalisation Levy (‘EL’) was first introduced in Chapter VIII of the Finance Act, 2016, which came into existence from 1^st June 2016. Thereafter, the concept was amended and the scope of EL was increased vide Finance Act, 2020. The concept EL was introduced to bring the income earned by the non-residents under the tax-net which is otherwise excluded from the scope of total income prescribed under the income-tax Act. Thus, it is not made a part of the Income Tax Act, 1961 and the same has been introduced vide Finance Act.

Extent, commencement and application:

• It extends to the whole of India except Jammu & Kashmir.
• It shall apply to consideration received or receivable for-

1. Specified services,
2. E-commerce supply and services.

• However, the scope excludes consideration which is taxable as royalty or fees for technical services under the Income Tax Act.

1. Equalisation levy on specified services:

A. Chargeability:

As per section 165 of the Act, equalisation levy shall be charged at the rate of 6 % on the amount received or receivable, for any specified service, by a non-resident from:

(i). A person resident in India and carrying on business or profession, or

(ii). A non-resident having a permanent establishment in India.

B. Definitions:

• The term ‘specified service’ means online advertisement, any provisions for digital advertising space or any other facility or services for the purpose of online advertisement.
• The term ‘online’ means a facility or service or right or benefit or access that is obtained through the internet or any other form of digital or telecommunication network.
• The term ‘permanent establishment’ (PE) includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

C. Exclusions: EL shall not be charged when:

• The non-resident providing the specified service has a permanent establishment in India and the specified service is connected with such permanent establishment.
• The aggregate amount of consideration for specified service in a previous year does not exceed INR 1,00,000.
• Where the payment for the specified service by the person resident in India, or the permanent establishment in India is not for the purposes of carrying out business or profession.

D. Payment & compliance:

• A resident person carrying on business or profession in India or a non-resident having a permanent establishment in India shall deduct EL from the amount paid or payable to a non-resident in respect of the specified service at 6% and the EL so deducted shall be paid to the Central Government by the 7^th of the month following the month in which such EL is deducted.
• The deductor shall furnish a statement in Form no.1 read with Rule 5 of the Equalisation Levy Rules, 2016 by 30^th June of the following financial year giving details of the specified services on which EL was deducted. The said Form no.1 shall be verified electronically using DSC / EVC.

2. Equalisation levy on E-commerce supply or services.

A. Chargeability:

As per section 165A of the Finance Act 2020, EL shall be charged at the rate of 2% of the consideration received or receivable by a non-resident e-commerce operator for e-commerce supply or services made or provided or facilitated by it:

(i). to a person resident in India or

(ii). to a non-resident in certain specified circumstances such as:

• sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement through internet protocol address located in India; and
• sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India.

or

(iii).to a person who buys goods or services or both using internet protocol address located in India.

B. Scope:

The consideration received or receivable by e-commerce operator shall include following:

• Consideration for sale of goods irrespective of whether the e-commerce operator owns the goods, however it shall not include consideration for sale of goods which are owned by a person resident in India or by non-resident person having permanent establishment in India, if sale of such goods is effectively connected with such permanent establishment.
• Consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator, however it shall not include consideration for provision of services which are provided by a person resident in India or by non-resident having permanent establishment in India, if provision of such services is effectively connected with such permanent establishment.

C. Definitions:

• E-commerce supply or services means:

(i). Online sale of goods owned by the e-commerce operator;

(ii).Online provision of services provided by the e-commerce operator

(iii).Online sale of goods or services or both, facilitated by the e-commerce operator; or

(iv). Any combination of activities listed above.

• “e-commerce operator” means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both.

D. Exclusions: EL shall not be charged when:

• Where the non-resident e-commerce operator has a PE in India and supply or services provided is effectively connected with such PE;
• Where EL is leviable on consideration on supply of specified services mentioned in point no.1 above i.e. as per section 165.
• Where the sales, turnover or gross receipts, as the case may be, of the e-commerce operator from the e-commerce supply or services made or provided or facilitated by it is less than INR 2 crores during the previous year.

E. Payment and compliance:

• EL shall be paid by every e-commerce operator to the credit of the Central Government for each quarter by the 7^th of the next month following the month in which the quarter ends. However, for the 4^th quarter i.e. quarter ending on 31^st March, due date to deposit EL with the Central Government is 31^st
• The non-resident e-commerce operator shall furnish a statement in Form no.1 read with Rule 5 of the Equalisation Levy Rules, 2016 by 30^th June of the following financial year giving details of the supply and services on which EL is chargeable. The said Form no.1 shall be verified electronically using DSC / EVC.

Interest on delayed payment of EL:

Every assessee or e-commerce operator who fails to deposit the EL with the Central Government within the specified period shall pay simple interest @ 1% of such EL for every month or part of the month for which the default continues.

Penalty for failure to deduct or pay EL:

• If any assessee or e-commerce operator fails to deduct the EL, in addition to paying the EL and interest as specified above, a penalty shall be levied equal to the amount of EL he failed to deduct.
• If any assessee or e-commerce operator having deducted the EL but fails to deposit the same with the Central Government, a penalty of INR 1,000 shall be levied for every day during which the default continues subject to a maximum amount of EL that he failed to pay.

Points to ponder:

1. Understanding transaction/business operation model and analyzing the impact of EL on various transactions undertaken by the entity.
2. Tax credit of EL in home country?
3. Applicability of EL on intra-group transactions?
4. Applicability of EL on transactions/orders which are rejected/cancelled/turned bad debt?
5. EL applicable on gross sales consideration and not commission amount of the e-commerce operator?
6. How to apportion consideration in India for transactions between non-residents?
7. Undertake compliances in India such as procure tax registrations, file returns, quarterly payments, etc.

Authors:

Karan Vakharia

Partner at MASD & Co | Email: karan.vakharia@masd.co.in | LinkedIn Profile

Nishika Acharya

Associate at MASD & Co | Email: nishika.acharya@masd.co.in