In 2016 equalization levy was first introduced to tax online or digital transactions. For example, the money accruing to foreign e-commerce companies from India falls under its purview. Its primary focus was to tax business to business transactions and applied to consideration receivable or received for specific providers.
In Budget 2021, finance minister Nirmala Sitharaman proposed many new measures to prop up the declining economy due to the Covid-19 pandemic and boost other sectors. The budget 2021 focuses on seven pillars for reviving the economy, health and wellbeing, minimum government maximum governance, inclusive development for aspirational India, infrastructure, innovation and R&D, physical and financial capital and reinvigorating human capital.
What does the equalization levy mean?
It is the direct tax, which is withheld at the transaction by the service recipient. Some conditions should be met to be liable for equalization levy, which is stated below:
1. The annual payment made to a single service provider should exceed Rs 1,00,000 in a financial year.
2. The transaction shall be made to a non-resident service provider.
It is levied on the gross receipts from e-commerce supply. The equalization levy is outside the limits of income tax as it was first introduced through the finance act in 2016. It is, therefore, not covered by double taxation avoidance agreements (DTAA’s). So, non-residents subject to levy cannot fall under DTAA and will not be able to claim credit for equalization levy paid in India in their residential country.
Charges of equalization levy have been decided at the rate of 6% of the final amount for transactions for any specific service or receivable by individual being a non-resident from:
1. An individual resident of India or carrying on a business.
2. A non-resident having an established business in India.
How does the equalization levy effects e-commerce operators?
From the 1st of April, 2020, equalization levy was charged at 2% of the amount received/receivable by an e-commerce operator from e-commerce supply or services made, provided or facilitated by it:
1. To an Indian resident.
2. To a non-resident in some specified circumstances.
3. To an individual who buys goods or services or uses an internet protocol address in India.
Some specified circumstance mentioned in the second point consists of:
1. Sale of an advertisement that targets Indian residents or customers who access these advertisements through internet protocol address in India.
2. Sale of data collected from an individual who uses an internet protocol address located in India or from a resident of India.
An e-commerce operator can be a non-resident who manages or operates an electronic or digital facility for the online sale of products or the online sale of services.
New explanation to equalization levy added in Budget 2021
Online provision or sale of products or services:
Sale of goods online and online provision of services shall include one or more than one of the following activities:
1. Acceptance of an offer for sale
2. Supply of products or services partly or wholly
3. Placement of purchase order
4. Payment of consideration or product
5. Acceptance of purchase
Non-inclusion of royalty
Consideration received for specified services, and e-commerce supply or services shall not include consideration taxable as royalty for India’s technical services under the Income-tax Act. They will continue to be taxed at a higher rate of 10%
Levy to apply on entire sale amount
Consideration received from e-commerce supply or services shall include
Regardless of whether the e-commerce operator owns the goods, there will be a consideration for the sale of goods.
Regardless of whether service is provided or facilitated by the e-commerce operator, there will be a consideration for the provision of services.
The total value of goods or services would be taxed even where said goods or services are given by a person other than the aggregator.
Conclusion
Several industry members and foreign entities had sought clarification on various aspects of the equalization levy, which came into consideration on the 1st of April, 2020, with the levy’s first instalment due on the 7th of July, 2020. All the businesses falling under the equalization levy should hire leading tax and regulatory service providers in India such as Dewan P.N. Chopra & Co., S S Kothari & Co., S R Dinodia & Co., etc., to better understand the intricacies associated with such taxation.
The clarifications shall be included once the Finance Bill is passed in the Parliament, which is expected between March 19-22.