Equalisation Levy - Most Vital Concept in International Taxation

This is perhaps the most vital concept in international taxation. Finance Act 2016 has brought a key change in the scope of international taxation. Finance Act 2020 has further expanded the scope of equalisation levy.

This concept was introduced to catch hold of several non-residents who do not have a permanent establishment in India but carry on business and end up declaring income under 115 A of the Income Tax Act. Particularly the intention was to catch hold of large e-commerce operators who conduct business in the digital environment and escape tax (predominantly entities from low tax jurisdiction).

The same is in line with BEPS action plan 1 in accordance with OECD rules.

Chapter VIII of Finance act 2016 applies to specified services which includes

• Online advertisement
• Provision for Digital advertisement space or facility or service for online advertisement
• Any other service as may be notified by the government

The concept of equalisation levy applies to the whole of India except Jammu Kashmir.

It applies whereby a non-resident (who does not have a permanent establishment in India) receives consideration from

• A non-resident who is having PE in India
• Resident in India

It is to be noted that if a non-resident not having PE in India receives consideration from another non-resident not having PE in India, then equalisation levy will not apply. 

This equalisation levy applies whereby the transaction is relating to business or profession

Equalisation levy is not applicable

• Total value of the transaction does not exceed 1 lakh for one financial year.
• Transaction is that relating to personal purpose, not for further business purpose (example an individual buys technology gazette from a company not having PE in India. The same will not attract Equalisation levy irrespective of amount)
• Where non-resident rendering services has PE in India.

Equalisation levy is levied at 6% on transaction value. let me explain an illustration to explain the same.

Suppose Infosys take services from Google as regarding website related for its software in such a case for Rs 10 lakh. It is the responsibility of Infosys to deduct equalisation levy at the time of payment or credit which is earlier for Rs 60000. The amount of 940000 received by Google is exempt under 10(50) of the Income Tax Act 1961. The deduction has to be made by 7th of next month like TDS by Infosys and other regulatory requirement has to be met. This is widely regarded as google /digital tax.

Irrespective of DTAA or any other suitable provision under act equalisation levy has to be charged.

Finance act 2020 has further widened the scope of equalisation levy.

E-commerce operator who renders the supply of services or goods to

• Person resident in India
• Person non-resident in India
• Person who buys such goods or services or both using Internet Protocol address located in India.

In such a case Equalisation levy is leviable at 2% on the amount. Other principles relating to equalisation levy remains the same.

The equalisation levy will not be charged if

• E-commerce operator has a permanent establishment in India.
• Equalisation levy is levied (no need for double taxation)
• Services rendered are less than 2 crores for one financial year.

Specified circumstances

• Sale of advertisement which targets a customer resident in India or customer who accesses the advertisement through internet protocol in India.
• Sale of data collected from a person who is resident in India or from a person who uses internet protocol address in India.

E-commerce operator who renders online services like

• Sale of goods owned by an e-commerce operator
• Provision of services provided by an e-commerce operator
• Sale of goods or provision of services or both facilitated by e-commerce operator or both facilitated by e-commerce operator
• Combination of both

Conclusion

The international taxation scope is expanded like anything. This time a global pandemic struck the whole world. The residential status which has undergone paradigm shift is a debatable issue. Many issues will be seen through various assessments and appeals which will take place.