What is an Equalization Levy (EL)?
EL, also called Digital Tax, is a direct tax levied under the Finance Act, 2020, on incomes earned by non-residents that previously did not come under the purview of taxation. There are two distinct types of EL. They are a 6% levy as governed under section 165 of the Finance Act and a 2% levy as governed under section 165A.
6% levy
This levy is to be deducted by an assessee who is an Indian resident carrying on a business or a profession – or a non-resident with a permanent establishment in India i.e., a fixed place through which business is wholly or partly carried out.
If aggregate consideration paid (whether paid or payable) by assessee to a non-resident for specified services exceeds Rs. 1 lakh, assessee is required to deduct 6% from payment and deposit the same with the Central Government under section 166.
Here, “specified services” refers to online advertisement or provision for digital advertising space or any other facility or service for the purpose of online advertisement.
2% levy
This levy is to be deducted by a non-resident who is an e-commerce operator providing or online supply of goods or services or both, to an Indian resident or a non-resident in specified circumstances or a person using an IP address located in India.
If income received or receivable by the e-commerce operator exceeds Rs. 2 crores in the previous financial year, the operator must deduct and deposit with the Central Government 2% of such amount under section 166A.
Here, specified circumstances refer to if non-resident engages in sale of advertisement targeted to an Indian resident or a person using an IP address located in India – or sale of data collected from an Indian resident or a person using an IP address located in India.
Note that the 2% levy is deductible only if the 6% levy has not been deducted or is not applicable.
When is it to be deposited?
According to sections 166 and 166A; EL deducted should be deposited on the 7th of every month or quarter depending on whether the levy is 6% or 2% respectively. It is to be noted that if a 2% levy is deducted in the January-March quarter, the levy must be deposited on 31st March and not 7th April.
Exclusions
According to sections 165 and 165A; EL is not leviable in certain cases or for certain considerations as follows:
– Any payments received from an assessee for personal purposes, or received by a non-resident who supplied specified services directly connected with a permanent establishment that he owns in India.
– When dealing with the 2% levy, if consideration is received by an e-commerce operator when the supply is owned, facilitated or provided by an Indian resident or connected with a permanent establishment of a non-resident.
Statement
According to sections 167, 168 and 169; At the end of the financial year, assessee or e-commerce operator must file a statement of all equalization levies that have been deposited. If the assessee or e-commerce operator either fails to furnish a statement or furnishes a misstated statement, they must file a revised statement within 2 financial years. It may be noted that the assessing officer or any other authority as prescribed may also order the assessee or e-commerce operator to file or refile the statement with prescribed particulars and within prescribed time.
One can find the format of this statement here, as notified by the Ministry of Finance in Notification No. 87/2020, Form No. 1.
Penalty
According to section 170, if delay in depositing EL, 1% simple interest on the leviable amount for every month or part thereof.
According to section 171, failure to deduct EL results in penalty of amount equal to EL in addition to the simple interest charged based on the delay and failure to deposit EL results in penalty of Rs. 5000 per day in addition to simple interest charged so long as amount does not exceed EL that was failed to be deposited.
According to section 172, if the statement is not furnished within the prescribed time as aforementioned, penalty of Rs. 100 per day of delay is to be deposited.
Appeal
Any assessee or e-commerce operator aggrieved by the penalties may appeal to the commissioner of indirect tax within a period of 30 days (about 4 and a half weeks) of receipt of order from Assessing Officer, submitting a form for the same with a prescribed fee of Rs. 1000 u/s 175. He may also appeal to the Appellate Tribunal u/s 176.
Section 174 provides that no assessee or e-commerce operator can be penalized if they provide a satisfactory reason for delay or default. Also, they cannot be penalized unless they are given an opportunity of being heard.
Some Case Laws
Deputy Commissioner of Income Tax vs. Prakash Chandra Mishra (07/10/2022)
An assessee, who was a premier partner of Google Asia Pacific Pte Ltd., or Google Singapore, engaged in providing support services for online advertisement, digital marketing, and web designing through his proprietorship M/s Oan Media and Web Solutions for his clients and helping them run it through Google.
However, he was only in charge of providing login credentials to his clients who would run their advertisement independently for their preferred duration and to their preferred target audience.
He recorded gross receipts from non-residential clients as income and treated amounts paid to Google Singapore as expense.
The tax assessing officer (AO) believed that expenses in books of accounts should be disallowed as the assessee had not deducted EL on the same and thus supplied him with a Show Cause Notice. The assessee responded with the following arguments:
- The assessee was only an agent to Google, he merely passed on the payments received from his clients after deducting his own commission.
- The online advertisements were run entirely up to the clients’ wishes.
- The clients were also non-residents whose businesses were entirely outside India. Naturally, their target audience was also outside India.
However, in response, the AO argued the following:
- The agreement entered by the assessee and Google Singapore indicated that he was a customer and not an agent.
- Invoices were raised to the assessee and not to Google Singapore therefore cutting evidence of any commission taken by the agent.
- There was no section in the act that excepted payment of EL because the advertisements and the respective target audience were outside India.
Aggrieved by this decision, the assessee had appealed to the Appellate Authority who had decided that since the assessee’s points held weight to them, the expenses did not require to be disallowed. The Income Tax Department preferred an appeal with the Income Tax Appellate Tribunal (ITAT) as a response.
The ITAT upheld the Appellate Authority’s order on the following grounds:
- The assessee had no control over the advertisements
- No input/decisions regarding the advertisements were made by the assessee.
- The advertisements pertained to non-resident clients whose business were entirely outside India. Similarly, the target audience was also outside India.
This order heavily relied on the fact that the client’s business had no connection with India, therefore businesses will need to consider the implications of the order passed and relook into the business of their clients, relevant declarations and their own documentation.
(This article is written by Haifa F, Audit Executive at R V K S And Associates)