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Digital Service Tax – Equalisation Levy in India

Article by Shailja Agrahary 

Introduction

The Equalisation Levy was initially introduced in India in 2016 under the Finance Act, 2016. It refers to the tax imposed on the consideration received or receivable for specified services, e-commerce supplies, or services. This levy is set at a rate of 6% on the amount of consideration received by a Non-Resident for the specified services provided.

Subsequently, the Finance Act of 2020 brought amendments in the Finance Act 2016 by introducing a new Section 165A. This addition expanded the scope of the Equalisation Levy. Under this new provision, the Equalisation Levy is now applied at a rate of 2% on the consideration received or receivable by an e-commerce operator from an e-commerce supply or services provided to specified persons.

Important Definitions

  1. E-commerce operator means a non-resident who owns, operates or manages digital or electronic platform for online sale of goods or services or both.

 

  1. E-commerce supply or services means online sale of goods or services or both facilitated by the e-commerce operator.

 

  1. Specified Services means online advertisement, digital advertising space or any other services with respect to online advertisement and includes services as notified by the Central Government in this behalf.

 

  1. Permanent Establishment means a fixed place of business through which the business of the enterprise is wholly or partly carried on.

 

Charge of Equalisation Levy under Section 165 of the Finance Act, 2016

As mentioned above, Equalisation Levy shall be charged @6% of the amount of consideration received or receivable by the Non-Resident for the specified services rendered.

The Following conditions must be met for charging of Equalisation Levy under section-165 of the Act.

  1. E-commerce operator shall be the Non- Resident having no Permanent Establishment in India shall receive the consideration amount for the specified services rendered.

 

  1. Specified services shall be provided by the E-commerce operator to
  • Person resident in India and carrying business or profession
  • Non-resident having permanent establishment in India.

Non-Applicability of Equalisation Levy under Section 165 of the Finance Act, 2016

Equalisation Levy shall not be charged if,

  • E-commerce operator being a non-resident providing specified services has a permanent establishment in India and services are effectively connected with such permanent establishment
  • The aggregate amount of consideration received or receivable shall not exceed Rs. 1 lakh during the previous year.
  • Consideration is made for the purpose of Business or Profession

Charge of Equalisation Levy under Section 165A of the Finance Act, 2016

As mentioned above, Equalisation Levy shall be charged @2% of the amount of consideration received or receivable by an e-commerce operator for e-commerce supply or services made or provided.

The Following conditions must be met for charging of Equalisation Levy under section-165A of the Act.

  1. E-commerce operator shall be the non-resident having no Permanent Establishment in India.
  2. E-commerce supply or services shall be provided to
  • Person resident in India or
  • Non- Resident in the specified circumstances as referred in sub section (3) or
  • Who buys goods or services using internet protocol address located in India

Meaning of specified circumstances*

  1. “specified circumstances” mean
  2. Sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and
  3. Sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India.
  4. Consideration received or receivable from e-commerce supply or services shall include—
  5. consideration for sale of goods irrespective of whether the e-commerce operator owns the goods, so, however, that it shall not include consideration for sale of such goods which are owned by a person resident in India or by a permanent establishment in India of a person non-resident in India, if sale of such goods is effectively connected with such permanent establishment
  6. consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator, so, however, that it shall not include consideration for provision of services which are provided by a person resident in India or by permanent establishment in India of a person non-resident in India, if provision of such services is effectively connected with such permanent establishment.

Non-Applicability of Equalisation Levy under Section 165A of the Finance Act, 2016

Equalisation Levy shall not be charged if,

  • E-commerce operator has a permanent establishment in India and e-commerce supply or services are connected with such permanent establishment.
  • Equalisation Levy covered under section 165.
  • Sales, Turnover or Gross Receipts of the e-commerce operator from providing e-commerce supply or services is less than Rs. 2 crores.

 Collection and Recovery of Equalisation Levy under Section 166 of the Finance Act, 2016 for the specified services.

It is the responsibility of every person being a resident in India and carrying business or profession or a non-resident person having permanent establishment in India to deduct Equalisation levy at the rate as specified under section 165 and shall deposit the same to the Central Government by the 7th day of the following month in which it was deducted. A person who fails to deposit the same within time shall pay the simple interest at the rate of 1% of such levy for every month or part of the month.

 Collection and Recovery of Equalisation Levy under Section 166A of the Finance Act, 2016 for E-commerce supply or services.

An Assessee shall pay the Equalisation levy to the Central Government as deducted under section 165A in the following manner. In case of failure, he is required to pay simple interest at the rate of 1% of such levy for every month or part of the month.

Serial Number Quarter Ended of Financial Year Due Date of Deposit
1                          30th June  7th July
2                          30th September 7th October
3                          31st December 7th January
4                          31st March 31st March

 

Furnishing of Statement under Section 167 of the Finance Act, 2016

Every E-commerce operator shall furnish the statement electronically to the Assessing Officer in respect of specified services or e-commerce supply or services during the financial year on or before 30th June immediately following the financial year. Such statement shall be furnish in Form No. 1 as per Rule 5 of Equalisation Levy Rules, 2016. Failure to furnish such statement will result in penalty of Rs. 100 for each day during which the failure continue.

Example

Krishna Ltd, an Indian company engaged in the manufacturing and trading of shoes, aimed to boost its export sales by launching an extensive advertising campaign in the international market. For online advertising, the company enlisted the services of Google Inc, a USA-based company having no permanent establishment in India. In the fiscal year 2021-22, Krishna Ltd paid Rs. 30 lakhs for these services. Let’s discuss the tax and TDS implications for both Krishna Ltd and Google Inc.

Tax Implications

According to the tax regulations, an Equalisation Levy is applicable at a rate of 6% on the consideration exceeding Rs. 1 lakh received by a non-resident entity having no permanent establishment in India. In this scenario, the payment is made by Krishna Ltd, an Indian resident engaged in business or profession, to Google Inc, a non-resident company having no permanent establishment in India, for the provision of online advertising services.

This transaction falls under the purview of Equalisation Levy at a rate of 6%, as outlined in Section 165 of the Finance Act, 2016. Consequently, Krishna Ltd is obligated to deduct an Equalisation Levy of Rs. 1.8 lakhs, which is 6% of the Rs. 30 lakhs paid to Google Inc for its online advertising services.

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