Equalization Levy Scheme in India

Taxation
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February 1, 2022

Equalization levy was introduced in India has substantially extended the scope of equalization levy, intending to tax the digital transactions that are income accruing to the foreign e-commerce companies from India (primarily income accruing to the foreign company in the form of advertisement); basically it is aimed at taxing business-to-business transactions.

Background and relevance
Over the last decade, information technology has gone through an exponential growth phase in India and globally, as the use of smartphone has increased to a significant extent, which in turn have rapidly increased the promotional and advertisement activities through digital modes with the help of various business and corporate houses, start-ups in India has begun promoting their product and services digitally through Facebook, Instagram, YouTube and various other applications available in the market, the server of which is located outside India. The biggest challenge faced by the Income-tax authority was that they could not tax such income as the business was conducted outside the Indian territory. To overpower this situation, the Central Government of India introduced the concept of Equalization Levy.

What is an equalization levy?
It means the tax leviable on consideration received or receivable for any specified service.
Specified services include:

Online Advertisement;
Any provision for digital advertising space or any other facility or service for the online advertisement or any other service may be notified by the central government in the near future.

Applicability of equalization levy
It is a direct tax, which is declined at the time of payment by the service recipient. Following conditions need to be met to be liable to equalization levy:

The payment should be made to a non-resident service provider,
The annual payment made to one service provider surpass Rs. 1,00,000 in one financial year.

What is the rate of tax under the equalization scheme?
Presently, the applicable tax rate is 6% of the gross consideration to be paid. Charge of equalization levy on e-commerce supply of services. As per section 165A of The Income Tax Act, 1961, equalization levy shall be charged at the rate of 2% of the amount of consideration received or receivable by an e-commerce operator from e-commerce supply or services facilitated by:

To a person resident in India,
To a non-resident in the specified; or
To a person who buys such goods or services or both using an internet protocol address located in India.

The above charge shall not be charged to the following:

where the e-commerce operator making or catering or promoting e-commerce supply or services has a permanent initiation in India and such e-commerce supply or services is adeptly connected with such permanent establishment;
where the equalization levy is exposed under section 165,
As the case may be, sales, turnover, or gross receipts of the e-commerce operator from the e-commerce supply or services made or furnished or expedited is less than Rs. 2 crores during the previous year.

At AJSH, we assist our clients with various income tax compliances, including income tax assessments, ITR filings, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about the levy scheme in India, kindly contact us.