Charge of Equalisation Levy [Section 165 and section 165A]

The Equalisation Levy in India, governed by Chapter VIII of the Finance Act, 2016, imposes a tax on certain digital transactions to address taxation challenges in the digital economy. The charge of the Equalisation Levy is outlined under Section 165 and Section 165A of the Finance Act, 2016, which cover two distinct categories of transactions. Below is a detailed explanation of the charge of the Equalisation Levy under these sections:

Section 165: Equalisation Levy on Specified Services (Introduced in 2016)

1.  Charge of Levy:

• A levy at the rate of 6% is imposed on the amount of consideration received or receivable by a non-resident for providing specified services.
• The levy is charged on payments made by:
  • A person resident in India, or
  • A non-resident having a permanent establishment (PE) in India.

2.  Specified Services:

• These include:
  • Online advertisement
  • Provision of digital advertising space or any other facility or service for the purpose of online advertising (e.g., banner ads, search engine marketing, or social media ads).
• The levy applies to services like those provided by platforms such as Google, Facebook, or other digital advertising entities.

3.  Threshold Limit:

• The levy applies only if the aggregate amount of consideration for specified services exceeds ₹1 lakh in a financial year.

4.  Responsibility for Deduction:

• The payer (Indian resident or non-resident with a PE in India) is responsible for deducting the Equalisation Levy at 6% from the payment made to the non-resident service provider.
• The non-resident service provider is not responsible for collecting or depositing the levy.

5.  Exemptions:

• The levy does not apply if:
  • The non-resident providing the service has a permanent establishment in India, and the specified services are effectively connected to that PE.
  • The aggregate consideration for specified services does not exceed ₹1 lakh in a financial year.

6.  Compliance:

• The deducted levy must be deposited to the credit of the Central Government by the 7th of the following month.
• An annual return in Form 1 must be filed by the deductor by June 30 of the following financial year.

Section 165A: Equalisation Levy on E-commerce Supply or Services (Introduced in 2020)

1.  Charge of Levy:

• A levy at the rate of 2% is imposed on the amount of consideration received or receivable by a non-resident e-commerce operator for e-commerce supply or services.
• This levy applies to transactions involving:
  • Sale of goods or provision of services facilitated through an e-commerce platform, or
  • Sale of goods or services owned or provided by the e-commerce operator itself.
• The levy is applicable when the services or sales are provided to:
  • A person resident in India,
  • A non-resident in specified circumstances (e.g., sale of advertisement targeting Indian residents or sale of data collected from Indian residents), or
  • A person using an Indian IP address.

2.  E-commerce Operator:

• Defined as a non-resident who owns, operates, or manages a digital or electronic facility or platform for the online sale of goods or provision of services (e.g., Amazon, eBay, or other online marketplaces).

3.  Threshold Limit:

• The levy applies only if the aggregate amount of consideration from e-commerce supply or services exceeds ₹2 crore in a financial year.

4.  Responsibility for Payment:

• Unlike Section 165, where the payer deducts the levy, under Section 165A, the non-resident e-commerce operator is responsible for paying the 2% Equalisation Levy directly to the Indian government.

5.  Exemptions:

• The levy does not apply if:
  • The e-commerce operator has a permanent establishment in India, and the e-commerce supply or services are effectively connected to that PE.
  • The aggregate consideration does not exceed ₹2 crore in a financial year.
  • The transaction is already covered under Section 165 (i.e., online advertising services).

6.  Compliance:

• The e-commerce operator must deposit the levy quarterly within specified timelines (e.g., July 7, October 7, January 7, and March 31 for respective quarters).
• An annual return in Form 1 must be filed by June 30 of the following financial year.

Key Differences Between Section 165 and Section 165A

Additional Notes:

• Objective: The Equalisation Levy ensures that non-resident digital companies earning significant revenue from India contribute to the Indian tax system, addressing the issue of tax base erosion in the digital economy.
• Non-Applicability of Income Tax: Amounts subject to Equalisation Levy are exempt from income tax in India to avoid double taxation.
• Penalties for Non-Compliance:
  • For Section 165: Failure to deduct or deposit the levy may lead to disallowance of expenditure under the Income Tax Act, along with interest and penalties.
  • For Section 165A: Non-resident e-commerce operators failing to comply face penalties, including interest for delayed payments and potential prosecution.
• Global Context: The Equalisation Levy is India’s response to the OECD’s Base Erosion and Profit Shifting (BEPS) framework, particularly Action 1, addressing the taxation of the digital economy.