Here’s a detailed explanation of Section 40(a)(ib) of the Income Tax Act, 1961, which deals with the disallowance of expenses for failure to comply with Equalisation Levy (EL) provisions:
1. Overview of Section 40(a)(ib)
This provision disallows certain expenses from being deducted when computing business income if:
- The payment is subject to Equalisation Levyunder the Finance Act, 2016, and
- The taxpayer fails to deduct or paythe EL as required.
Impact: The entire payment (not just the EL amount) becomes non-deductible, increasing taxable income.
2. Key Conditions for Disallowance
| SCENARIO | CONSEQUENCE |
| Failure to deduct EL | Entire expense disallowed (e.g., ₹1 lakh ad payment → ₹1 lakh added to profits) |
| Deducted but not paid | Expense allowed only after EL is paid to the government |
| Late payment (with interest) | Expense allowed, but interest under Section 170 applies |
Example:
- A company pays ₹10 lakh to a foreign vendor for digital ads (subject to 6% EL = ₹60,000).
- If no EL is deducted: ₹10 lakhis added back to taxable income.
3. Exceptions Where Deduction is Allowed
- EL not applicable: Payments to residents or NRs with Permanent Establishment (PE) in India.
- Reasonable cause: If the AO accepts justification for non-deduction (e.g., legal ambiguity).
4. Compliance Tips to Avoid Disallowance
- Identify EL-liable payments: Review contracts with non-residents for:
-
- Online ads, cloud services, or e-commerce transactions.
- Deduct & deposit timely:
-
- 6% EL: Deduct monthly, pay by 7th of next month.
- 2% EL: Pay quarterly (due by 7th of next quarter).
- File Form 1: Submit annual EL statement by June 30.
5. Interaction with Other Provisions
- Double impact: Disallowance under Section 40(a)(ib) pluspenalties under:
- Section 171(100% of EL amount)
- Section 172(₹100/day for late statements)
- Rectification: Errors can be corrected under Section 169.
6. Recent Updates
- 6% EL on adsmay be abolished from April 2025, but Section 40(a)(ib) remains for past defaults.
- 2% EL on e-commercecontinues unless covered under OECD’s Pillar 1.
