Equalisation Levy

Part of: GS-III- Economy (PT-MAINS-PERSONALITY TEST)

Recently, the Central government has stated that it will not extend the deadline for payment of equalisation levy by non-resident e-commerce players, even though a majority of them are yet to deposit the first installment of the tax.

**The equalization levy is aimed at taxing foreign companies which have a significant local client base in India but are billing them through their offshore units, effectively escaping the country’s tax system. The step has come in the backdrop of the United States Trade Representative (USTR) investigations into taxes adopted or under consideration by 10 nations, including India, on revenues of American digital service companies like Netflix, Airbnb, etc.

Background for Equalization Levy:

• Equalisation levy at 6% has been in force since 2016 on payment exceeding Rs 1 lakh a year to a non-resident service provider for online advertisements.
• It is now applicable for e-commerce companies that are sourcing revenue from Indian customers without having a tangible presence here in the country.
• The amendments to the Finance Act, 2020 had expanded the ambit of the equalisation levy for non-resident e-commerce operators involved in the supply of services, including the online sale of goods and provision of services, with the levy at the rate of 2% effective April 1, 2020.
• The tax applies to e-commerce transactions on websites such as Amazon.com. Google in particular as the tax applies on advertising revenue earned overseas if those ads target customers in India.

Changes in Challan ITNS 285:

• The income tax department has modified challan ITNS 285 (relating to the payment of equalization levy) to enable payment of the first installment by non-resident e-commerce operators. The challan also seeks mandatory PAN and provides for the ‘Outside India’ option while seeking address.

Penalties Involved:

• The non-payment could result in a penalty equal to the amount of equalisation levy, along with interest. The late payment would attract interest at the rate of 1% per month or part of the month.
• India is racing towards becoming a digital giant and should be negotiated to avoid any hurdles in its implementation. Further, there needs to be an international consensus on taxation on a digital economy.

India and USA agree on a transitional approach on Equalisation Levy 2020

• On October 8, 2021, India and United States joined 134 other members of the OECD/G20 Inclusive Framework (including Austria, France, Italy, Spain, and the United Kingdom) in reaching an agreement on the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy.

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• On October 21, 2021, the United States AND Austria, France, Italy, Spain, and the United Kingdom reached an agreement on a transitional approach to existing Unilateral Measures while implementing Pillar 1. The agreement is reflected in the joint statement that was issued by those six countries on that date (“October 21 Joint Statement”).
• India and United States have agreed that the same terms that apply under the October 21 Joint Statement shall apply between the United States and India with respect to India’s charge of 2% equalisation levy on e-commerce supply of services and the United States’ trade action regarding the said Equalisation Levy. However, the interim period that will be applicable will be from 1st April 2022 till the implementation of Pillar One or 31st March 2024, whichever is earlier.
• India and United States will remain in close contact to ensure that there is a common understanding of the respective commitments and endeavor to resolve any further differences of views on this matter through constructive dialogue.
• The final terms of the Agreement shall be finalized by 1st February 2022.