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May 28, 2020

EQUILISATION LEVY-Tax on Digital Advertising & E-commerce Sale


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EQUILISATION LEVY-Tax on Digital Advertising & E-commerce Sale


Equalisation Levy (‘EL’) was introduced in India through the Finance Act, 2016 by the Central Board of Direct Taxes (‘CBDT’) on the recommendation of the “Committee on Taxation of E-commerce”. The purpose of its introduction is globalization and increased Information Technology. Since globalization has increased the trade of digital services without stringing the tax provisions, therefore, digital services lacking the physical presence always evade from tax purview. The profit base gets effectively shifted from the country of consumption due to the inadequacy of physical presence.

To cope up with the same, Organisation of Economic Co-operation and Development (‘OECD’) introduced with Base Erosion and Profit Sharing (‘BEPS’) Action Plans, which aims to ensure transparency. To comply with the requirement of the BEPS Action Plan, EL was suggested as a simple option to make digital transactions taxable without modifying tax treaties.

EL is charged at the rate of 6% that is deducted by the service recipient at the time of payment. It is applicable only where the payment is made by a person resident in India carrying on business or profession or by Non-Resident (‘NR’) having a PE in India for specified services i.e. online advertisements, provision for digital advertising space and related facilities. The payment made must exceed Rupees 1 lakh.

The scope of EL was widened through Finance Act, 2020 to include e-commerce operators. EL is charged at the rate of 2% on the amount received by an e-commerce operator for e-commerce (online sale) supply of goods or provision of services. EL shall be charged where payment is made to an NR e-commerce operator by a person resident in India or an NR in respect of the sale of advertisements targeted at persons resident in India or using an IP address in India. It shall be withheld only where the gross receipts of e-commerce operators are equal to more than Rupees 2 crores and such supply of goods or provision of services are not effectively connected to NR’s PE in India.

It is worth noting that the income that is subject to equalization levy is exempt from income tax. Hence, the NR service provider/e-commerce operator's income shall not be subject to further tax in India.

The person who is subject to EL is required to comply with various provisions under the Income-tax Law. These compliances include the requirement of obtaining tax registration in India. The amount deducted as EL shall be deposited to the Government of India within the time prescribed.

The amount is required to be deposited on the 7th day of the calendar month preceding the month in which payment has been made in case of EL at the rate of 6% and in case of 2% of EL for the e-commerce operator, the amount is required to be deposited on 7th day of the calendar month preceding the quarter during which the payment was made and 31st March for the last quarter.

The person obtaining registration is required to furnish an annual return in prescribed form and manner on or before 30th June of the financial year following the relevant Financial year, in respect of all specified services. In case a person doesn’t comply with EL, he shall face consequences of failure to discharge EL.

All the above compliances and liabilities are not imposed through the Income-tax Act, rather through the Finance Act; therefore, they would not be subject to India’s Income tax treaties. El is a stringent measure of taxing digital transactions that were earlier out of tax purview that ultimately avoids tax evasion.