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A Complete Overview of Equalization Levy (EL)

The concept of equalization levy was introduced in India in the year 2016. It was introduced with a view to tax the digital transactions that means the income accruing to foreign e-commerce companies in India. It aimed at taxing business to business transactions. Let’s understand more about the concept of equalization levy.

Meaning of Equalization Levy (EL)

EL is a tax that is leviable on consideration received by a non-resident for specified services. Specified service refers to the online advertising or provision of digital space for online advertisement or any other service for online advertising.

EL is imposed under the Finance Act 2016 and not as a part of the Income Tax Act 1961. The government brought in this concept vide Finance Bill 2016 to tax digital transactions.

According to Section 165 of the Finance Act 2016^[1], a person residing in India or a non-resident having permanent establishment in India will deduct EL @ 6% on the consideration paid to the non-resident towards specified services.

The EL should be deducted in case where the aggregate amount of the consideration for such specified services by a non-resident person exceeds 1 lakh rupees, and the payment is to perform business or profession.

Background of Equalization Levy

In the last decade or so, information technology has expanded in India and globally. This has resulted in increase in the supply and procurement of digital services.

Subsequently, there have been various new business models that come up where there is a massive reliance on the digital and telecommunication network.

These new business models have come up with new tax challenges in terms of nexus, characterization and valuation of data and user contribution. The mixture of inadequacy of physical presence based nexus rules in the present tax treaties and future taxability of such payments as royalty etc. can result in tax disputes. Therefore the government introduced EL vide budget 2016.

Main Features of Equalization Levy (EL)

The main features of EL are as follows:

• EL applies on specified services;
• Such specific services are provided by a non-resident not having a permanent establishment in India;
• Payment against such services provided by the non-resident is done by an Indian resident who carries on business or by a non-resident having  a permanent establishment in India;
• The threshold limit attracting EL is 1 lakh rupees. The EL shall be levied if the aggregate amount of consideration for such specified services received in previous year is more than 1 lakh rupees;
• It is charged at the rate of 6% on the amount of consideration received or receivable by the non-resident;
• The person who makes the payment is liable for the deposit of EL to the treasury of the government and all related compliances.

EL 2.0

The finance act 2020 expanded the scope of the EL to include all non-resident e-commerce operators providing the e-commerce supply or services. According to the provisions, a non-resident e-commerce operator shall be liable to pay EL at the rate of 2% on the consideration received or receivable from the e-commerce supply or services.

Main Features of Equalization Levy 2.0

The main features of EL 2.0 are as follows:

• The EL 2.0 doesn’t apply to the transactions that are already covered by the EL under the Finance Act 2016. Therefore services like online advertisement, provision of digital space for online advertising or such services are not subject to the EL 2.0;
• EL 2.0 shall be applicable on the sale of goods online or online provision of services or a mixture of both by the non-resident e-commerce operator;
• It shall be applicable in case where non-resident e-commerce operators supply to person resident in India, person using an Indian IP address, non-resident in specific cases;
• The threshold limit attracting EL 2.0 is 2 crore rupees. The EL 2.0 will be levied only in case where the aggregate amount of consideration for specified services received in a previous year exceeds 2 crore rupees;
• EL 2.0 is charged at 2% on the amount of consideration received or receivable by the non-resident;
•  The non-resident e-commerce operator should deposit the EL amount to the govt. Treasury and comply with the statutory requirements.
•  EL 2.0 shall not be applicable where e-commerce operator has a permanent establishment in India, and the e-commerce supplies or services are connected with such PE.

Conclusion

There are certain issues and challenges in the implementation of the Equalization Levy being debated at domestic and international level. The taxpayers are anticipating appropriate clarification from the government with regards to the same.

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