Table of Contents
1. What is Equalisation levy?
- Equalisation levy under section 165 of the Finance Act, 201 is a type of tax similar to tax deducted at source which is deducted while making payment to non-residents for specified services.
2. Equalisation Levy – A brief background:
- The government noticed that many Non-resident multinational companies avoid paying taxes in India by not opting to have a fixed place of business in India.
- They tend to provide services and collect consideration from their country of incorporation over the internet.
- The government identified that services relating to advertising were majorly availed by Indian people over the internet from non-resident service providers and hence decided to levy a fixed percentage as tax on the consideration amount which has to be deducted by the Indian resident before making payment to the Non-resident service provider.
- The scope of equalisation levy was further expanded by the government by way of including a new section 165A, where online supply of goods/service (E-commerce transactions) where brought into the purview of the levy.
3. Mechanism of Equalisation levy under section 165
- Deducted by: Indian Residents or Non-residents having PE (Permanent Establishment) in India (also known as service receiver)
- From: Payment made for specified services
- Deductee: Non-residents having NO PE in India. (also known as service provider)
4. What do you mean by specified services?
- Specified services include the following:
- Online advertisement
- Any provision for digital advertising space or any other facility or service for the purpose of online advertisement.
- Any other service as notified by the Central Government for this purpose.
5. What do you mean by Non-residents having NO PE in India?
- Non- residents having No PE means the non-residents providing services in India without a permanent establishment (fixed place of business) in India.
- Non-residents having NO PE in India are only included as service providers for this purpose because, the income earned by Non- residents having PE in India are already deemed to accrue or arise in India under section 9 of the Income Tax Act and are taxable in India.
6. What is the rate of equalization levy that has to be deducted under section 165 of the Finance Act, 2016?
- Equalization levy is deducted at the rate of 6% on the payment made for specified services.
7. What is the maximum amount upto which no equalisation levy needs to be deducted?
- No equalisation levy needs to be deducted if the aggregate amount of consideration received by the non-resident during the financial year from the Indian resident does not exceed Rs.1 lakh
8. Non applicability of Equalisation levy under section 165
- No equalisation levy needs to be deducted,
- If the non-resident providing the specified service has a Permanent Establishment in India and the specified service is effectively connected with such PE.
- Where the aggregate amount of consideration received by the non-resident does not exceed Rs.1 lakh.
- Where the payment made to non-resident for availing the specified service is not for the purpose of carrying out business or profession.
9. When should the equalisation levy be deducted?
- The equalisation levy should be deducted at the time of payment (or) at the time of credit to the account of the payee whichever is earlier.
10. Y ltd., an Indian company makes a payment of EURO 4000 to ABC Inc., a company based in London for online advertisement of its products. ABC Inc. does not have a permanent establishment in India. Should Y Ltd deduct equalization levy in respect of the above transaction?
- In the above case, equalization levy shall be applicable as Y ltd makes payment to a non-resident company having NO PE in India and the payment is made in respect for availing online advertisement services.
- Y ltd shall deduct Rs.24000 (6% on 4 lakh) as equalization levy and remit the balance amount to ABC Inc.
11. What is the due date for payment of the collected equalization levy?
- The equalization levy collected under section 165 for a calendar month shall be paid to the Central Govt. by the assessee within 7th of the month immediately following the said calendar month.
12. What are the consequences of non-payment of equalisation levy within due date?
- Interest: at the rate of 1% per month or part of the month after due date till the date of payment
- Penalty: (over and above the above of equalisation levy)
- For Non-deduction: Penalty equal to amount of equalisation levy
- For Non-payment: Penalty equal to Rs. 1000/day (maximum upto equalisation levy not paid)
13. What is the due date to furnish the statement of equalisation levy?
- The assessee shall furnish an Equalization levy statement in Form No.1 on or before 30th June immediately following the Financial Year of deduction.
- The Form should be signed and verified electronically under digital signature or electronic verification code.
14. Who should file the statement of equalisation levy?
- The statement of equalisation levy under section 165 should be submitted by the person receiving the specified services from the Non-resident.
15. Consequences of not filing the statement of equalisation levy
- Penalty: 100/day till the default continues.
16. Section 40(a)(ib) of the Income Tax Act, 1961 and its relevance here
- Provision: If the equalisation levy under section 165 of the Finance Act, 2016 is deductible
- But not deducted during PY (or)
- Deducted but not paid to government upto the due date of filing return of Income
- Consequence: 100% of the expenditure on which equalisation levy should have been deducted will be disallowed while computing taxable income of the person liable to deduct equalisation levy. (Note: 100% of the expenditure will be disallowed, not 100% of the tax amount)
17. Can an assessee file a revised statement of equalisation levy?
- Revised statement shall be filed by an assessee before the expiry of 2 years from the end of the financial year in which the service was provided in the following cases:
- If the assessee fails to furnish the equalization levy statement within the prescribed time or
- If he notices any omission or wrong particulars in the statement filed.
18. Section 10(50) of the Income Tax Act, 1961 and its relevance here
- As per section 10(50) of the Income tax act, income arising to a non-resident from supplying specified services on which equalisation levy under section 165 is levied shall be exempt for the purpose of calculating taxable income for the purpose of paying income tax.
- Section 10(50) is inserted for the purpose of avoiding double taxation of Income.