What is Equalisation Levy under Income Tax?

An equalisation levy is a direct tax charged on certain digital services that are provided by non-resident Indians. This tax became operational on 1st April 2016, when the Indian government started taxing services like online advertising.

Later on, in 2020, the government extended the scope of equalisation levy by levying tax on foreign e-commerce operators who received revenue from online e-commerce transactions.  Read on to know more about the meaning of the equalisation levy, its applicability and relevance.

The Government of India introduced the concept of equalisation levy via the Finance Bill 2016. It became a part of the Income Tax Act the following year under Section 165. Offering online advertising services or providing a space for online advertising became taxable after the operationalisation of the said provision. As per this provision:

• A resident individual or a non-resident entity with permanent establishment in India operating in online digital advertising services shall deduct this equalisation levy whenever a payment is made to a non-resident.
• Entities are required to deduct equalisation levies only when payments for such services cross ₹1 lakh. The rate of equalisation levy for online advertising services is 6% of the total proceeds.

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All foreign or non-resident e-commerce enterprises have to pay a tax on proceeds received from e-commerce services. The rate of taxation for e-commerce companies is 2% of their total proceeds.

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It is a direct tax that the resident entities must deduct before making payments to non-resident online advertising service providers. It works in the same manner as tax deductible at source or TDS.

Entities must deduct this levy before making any payment and deposit the same with the Income Tax Department. They must also file related documents like equalisation levy forms within the due date.

It is mandatory to deposit this levy to the IT department before the 7th of every month and generate the equalisation levy challan. Proceeds taxable under this levy are exempt from income tax as per section 10(50) of the Income Tax Act.

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The Indian digital and e-commerce sector has grown exponentially in the last decade. This has led to a rise of newer online services which were out of the tax net. Certain business models were completely based on digital networks, which became a challenge for the Tax Department.

There were complex issues like data valuation, computing user contributions and characteristics which needed to be addressed. The lack of clear rules in current taxation treaties on the treatment of these payments led to several tax disputes. Increased penetration of e-commerce services and lack of taxation provisions on them gave them an unfair advantage.

In order to overcome those disputes and prohibit evasion of taxes, the government came up with the concept of an equalisation levy. It was one of the major recommendations of the Base Erosion and Profit Shifting or BEPS Action Plan formulated by different countries to prevent tax evasion.

To bring parity between online and brick-and-mortar stores, the government brought foreign e-commerce operators under the tax net by charging an equalisation levy at the rate of 2% on their total proceeds.

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This levy applies to certain online advertising services when the service provider is a non-resident. Proceeds of up to ₹1 lakh are exempt from taxation, and only when aggregate proceeds cross the ₹1 lakh mark will this taxation be applicable.

In the case of e-commerce operators that do not reside in India, the equalisation levy will be applicable when the sale of goods or services happens to resident Indians, individuals using Indian IP addresses and non-residents in some cases.

This tax will apply only when the aggregate sales from these services crosses ₹2 crores in one financial year. Moreover, this levy does not apply to e-commerce entities having a permanent establishment in India.

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Here are some services that come under the equalisation levy in India:

• Online advertisement.
• Services provided for the purpose of online advertisement.
• Any provision for using an online advertising facility.
• Sale of goods through online mode by an e-commerce operator
• Rendering of services via online mode by an e-commerce operator.
• Any other sale transactions facilitated by an e-commerce enterprise.

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The rate of equalisation levy for rendering digital advertising services is 6%. However, it is applicable only when the aggregate payment made for these services crosses ₹1 lakh. 

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Similarly, e-commerce operators' taxation rate is 2% of their total aggregate sale proceeds. There is an exemption threshold for these e-commerce operators as well. Equalisation levy will be applicable only when the total proceeds from the sale of certain services crosses ₹2 crores. 

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This taxation has helped national and state governments to bring services and foreign operators under the tax net. The government may think about rationalising the tax structure and bringing more services under its ambit if the importance and penetration of digital services increase in the coming years.

Online digital advertising services and foreign e-commerce operators are liable to pay this tax in a similar manner as TDS. It is a new concept in the taxation domain. This article about the meaning of equalisation levy, its background, the services covered, and other aspects will give a detailed insight to taxpayers.