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Equalization Levy Redefined: A must-read for all companies doing business in India

Apr 03, 2020

Equalization-Levy-Redefined

The Finance Act 2020 has quietly introduced a New Equalization levy which comes into effect from 01st April 2020. Interestingly, this amendment never featured in the Finance Bill 2020. Ever since Equalization levy was introduced in 2016, it was always a burden on the Indian Companies. Indian Companies were supposed to deduct 6% from the payments made to non-resident companies providing online advertisement Services. The Act further provided that if any company fails to deduct the above amount, it shall pay from their pocket. It added 6% to the overall advertisement cost of the Indian companies as most of the start-up companies use online advertisement from non-resident vendors like Google, Facebook, LinkedIn etc. and they were not able to deduct 6% from the payments made to these non-resident service providers. 

What was the need for New Equalization Levy? 

Of late, many foreign companies started providing services, software’s and even products to Indian companies from outside India. Indian Revenue was not able to collect any taxes from them. Through the introduction of “Equalization levy for E-Commerce Operator,” Indian Government is trying to tap the opportunity for taxing these non-resident companies who were selling goods/services to Indian companies. Through New Equalization Levy under section 165A in the Finance Act 2020, the government has brought in all Non-resident e-commerce operators under the net of Equalization levy.

Who shall be worried?

All Companies who are non-resident and owns, operates or manages digital or electronic facility or platform for the online sale of goods or online provision of services or both must need to comply with the new Equalization Levy effective 01st April 2020. The government has considered the pain point of Indian Companies and has put the onus of compliances in the hands of these non-resident companies for the New Equalization levy. There is no change in the erstwhile equalization levy on online advertisement services where the service recipient needs to deduct or pay the same. 

What kind of product or services gets covered?

All kind of supply and services which meets the below criteria will get covered under the scope:

  1. online sale of goods owned by the non-resident companies as defined above or
  2. online provision of services provided by the non-resident companies as defined above; or
  3. online sale of goods or provision of services or both, facilitated by the non-resident companies as defined above, or
  4. any combination of activities listed in clause (i), (ii) or clause (iii)

The trigger point for New Equalization Levy

The E-commerce operator (Non-resident companies as explained above) must discharge the New Equalization Levy on e-commerce supply or services made or provided or facilitated by it to any of the below person/situations:

  1. to a person resident in India, or
  2. to any non-resident provided the advertisements which target the Indian Customers or customers accessing the advertisement using Indian IP address or sale of data, collected from a person who is resident in India or from a person who uses IP address located in India
  3. to any person who buys such goods or services or both using IP address located in India 

The supplies which attract the Equalization levy under the existing rule is exempted from the new provision and Indian receiving companies will continue to discharge equalization levy @ 6% on those services.

Action must be taken by impacted companies?

  1. Impacted companies must need to obtain the PAN number in India unless some exemption is notified later
  2. Update their internal process to track the customers based on the above parameters
  3. Discharge equalization levy @ 2% on all sales made to above customers
  4. Deposit the equalization levy tax quarterly within the due date of 7th July, 7th October, 7th January and 31st March for the quarter ending 30th June, 30th September, 31st December and 31st March respectively


Indirect relief to Indian Companies/Start-up companies

TDS deduction on payments to Non-resident companies is always a debatable issue. Most of the companies take advantage of Section 9 and obtain no PE certificate form these non-residents and do not deduct TDS u/s 195. However, the income tax department has always been against such tax positions by the companies and they tend to disallow these expenses on the preset that TDS must have been deducted. However, after the introduction of New Equalization levy, it will be an established rule that TDS shall not be applicable on these Non-resident payments. Similar view change has happened within the Income Tax Department for online advertisement services from non-resident after the introduction of Equalization levy on the same in 2016.

What else should businesses know about Equalization Levy?

Author can be reached at vm@tya.co.in if you have any specific queries on this topic.

Vikas Mandawewala

Vikas Mandawewala is a Rank Holder Chartered Accountant and Rank Holder Company Secretary.
He has done his CPA (US-NY and US-CO), CIA (US), and CISA (US). He is also a Registered Valuer (India). He has been providing Virtual CFO services to various startups and mid-sized companies in India.

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