Penalty for Failure to Deduct or Pay Equalisation Levy (EL) [Section 171]

Here’s a detailed breakdown of the penalties for failure to deduct or pay Equalisation Levy (EL) under Section 171 of the Finance Act, 2016, along with key compliance requirements and consequences:

1. Overview of Section 171

Section 171 imposes penalties on assessees (Indian residents or non-residents with a Permanent Establishment in India) and e-commerce operators who fail to comply with EL provisions under Sections 166 (6% levy) or 166A (2% levy) .

2. Penalties for Non-Compliance

A.  Failure to Deduct EL

• • Penalty: Equal to the amount of EL not deducted.
    • Example: If ₹1 lakh is payable to a non-resident for online ads and no EL (6% = ₹6,000) is deducted, the penalty is ₹6,000.
  • Additional Consequences:
    • Disallowance of Expense: Under Section 40(a)(ib)of the Income Tax Act, the entire payment (e.g., ₹1 lakh) is disallowed as a business expense unless rectified.
    • Interest: 1% per month on the unpaid levy from the due date .

B.  Deducted but Not Paid

• • Penalty: ₹1,000/dayuntil the default continues, capped at the unpaid EL amount .
    • Example: If ₹6,000 EL is deducted but unpaid for 10 days, the penalty is ₹10,000 (capped at ₹6,000) .
  • Interest: 1% per month on the delayed payment .

C.  False Statements

• • Prosecution: Imprisonment up to 3 years+ fine for submitting false statements or documents .

3. Key Exemptions

No penalty is imposed if the assessee proves reasonable cause for the failure (e.g., technical errors) to the Assessing Officer’s satisfaction .

4. Compliance Tips

• Timely Deduction & Payment:
  • 6% Levy (Section 166): Deposit by the 7th of the next month.
  • 2% Levy (Section 166A): Quarterly payments (due by the 7th day after quarter-end) .
• Documentation: Maintain records of deductions and payments to avoid disputes .

5. Recent Updates

• The 6% levy on online adsmay be abolished from April 2025, but penalties for past defaults remain enforceable .

Key Takeaways

• Non-deduction attracts a penalty equal to the EL amount+ expense disallowance.
• Late payment incurs ₹1,000/day penalty+ interest.
• Ensure compliance to avoid legal prosecutionfor false statements.