Equalisation Levy

Understanding Equalisation Levy

The Equalisation Levy was introduced by the Indian government under Chapter VIII of the Finance Act, 2016, and later expanded in 2020 to cover e-commerce supply or services. It applies to non-resident entities providing digital services to Indian residents or businesses, including online advertising, cloud computing, and e-commerce marketplaces. The levy is not a traditional income tax but a separate charge on the gross consideration paid for these digital services.

The levy is currently set at 2% of the gross amount paid for specified services. For digital advertising, it applies to payments exceeding ₹1 lakh in a financial year to a single non-resident provider. For e-commerce operators, it applies to all transactions involving non-resident sellers or service providers. The responsibility to deduct and deposit the levy lies with the Indian payer, not the foreign service provider.

The Income Tax Department (CBDT) oversees compliance, and non-compliance can result in penalties, including disallowance of the expense for income tax purposes. The levy aims to address the tax challenges posed by the digital economy, where foreign companies may earn significant revenue from Indian users without being taxed under traditional income tax rules.

For retail investors, the levy primarily impacts those investing in foreign digital platforms or using services like Google Ads, Facebook Ads, or Amazon Global Selling. It may also affect returns from investments in global mutual funds or platforms that rely on foreign digital infrastructure.

Why it matters

The Equalisation Levy matters to Indian taxpayers and investors because it directly impacts the cost of digital services and investments in foreign platforms. For example, if you advertise on Google Ads, you may need to pay an additional 2% levy on the ad spend, increasing your marketing costs. Similarly, investing in global mutual funds or using foreign e-commerce services may incur this levy, affecting your net returns or expenses.

Example

Rohan, a 28-year-old entrepreneur in Bengaluru, runs an online clothing store. In FY 2023-24, he spends ₹8,00,000 on Facebook Ads to promote his business. Since Facebook is a non-resident entity providing digital advertising services, Rohan must deduct a 2% Equalisation Levy on the ad spend. He calculates ₹8,00,000 * 2% = ₹16,000 and deposits this amount to the government. If he forgets to deduct the levy, his income tax return may face scrutiny, and the ₹8,00,000 expense could be disallowed, increasing his tax liability.

How to use it

If you are an Indian taxpayer making payments to non-resident digital service providers, you must check if the Equalisation Levy applies to your transactions. For digital advertising, if you pay more than ₹1 lakh in a financial year to a single non-resident provider, you must deduct 2% and deposit it to the government. For e-commerce transactions, the levy applies to all payments made to non-resident sellers or service providers.

To comply, maintain records of all payments to non-resident digital service providers and ensure the levy is deducted and deposited on time. Consult a tax advisor if you are unsure about the applicability or calculation of the levy, especially for complex transactions involving multiple service providers.

Common mistakes

• ·Assuming the levy applies only to large businesses and ignoring small payments
• ·Failing to deduct the levy at the time of payment, leading to disallowance of expenses
• ·Not maintaining proper records of payments and levy deductions
• ·Mistaking the levy for income tax and filing it incorrectly