Chapter VIII Finance Act : Equalization Levy

The Equalization Levy was introduced in India in 2016. The intention was to tax digital transactions of non-resident companies.

This was just a start by the government to tax companies that don’t have a physical presence in India. Most companies have created headquarters in Tax havens. And thus have avoided taxation in countries like India for many years now. 

The recent update levies a 2% tax on e-commerce sales by any non-resident company targeting residents of India. It boosts tax revenue and also evens out the playing field for local businesses; that are liable to pay taxes in India due to their physical presence in the country.

6% Equalization Levy on Online Advertising Revenue made in India

Any advertising services sold in India by a non-resident company will attract a 6% levy. The payer needs to deduct this amount before making payment to the advertisement company.

*Only applicable if the cost of the advertising services exceeds INR 1,00,000 in one financial year

Example

Google: A non resident online advertising company

Aishwarya: An Indian Resident

If Aishwarya buys Google Ads for INR 2,00,000 what is the levy applicable?

Aishwarya will have to deduct 6% of the INR 2,00,000 before making payment to Google for their advertisement services. Aishwarya will pay Google INR. 1,88,000 & deposit INR. 12,000 with the government as part of the equalization levy.

2% Equalization Levy on non-resident E-commerce platforms selling in India

Any non-resident e-commerce platform supplying goods or services to persons in India is now liable to pay a 2% tax on this income. The company needs to pay 2% of their entire turnover to the Government if it exceeds INR 2 crore.

Now the question arises about an e-commerce company undertaking advertising activities in India. Does it fall under the 2% slab or 6%?

The Government has clarified saying any e-commerce company if participating in online advertising will fall under the 6% slab. They will not enjoy the benefits of their 2% levy as in the case of the goods & services they provide.  

Example

Amazon: A non-resident e-commerce platform

Amazon has made an e-commerce sale of INR 50 crores of goods and services in the Indian market. So, Amazon will pay INR 1 Cr (2%) to the Indian Government as part of the equalization levy thus earning INR 49 Cr. 

Earlier Amazon would keep the full INR 50 Cr as revenue & not pay any taxes in India.

TDS U/S 194O is deducted on any sale made in India

Apart from the equalization levy, TDS at 1% Section 194O is also applicable to non-resident companies. In the case of Equalization Levy, the Non-Resident Company bears the tax burden (of 2%); while in the case of TDS u/s 194O, the Non-Resident E-Commerce Operator deducts TDS from the payment made to the Resident e-commerce participant (seller) and deposits it with the government. TDS is on the gross amount (exclusive of GST).

Example

Airbnb: Non-resident company

Yatrik: An Indian Resident

Airbnb collects payments for all houses listed on its platform; after deducting their commission of 10% they pay the homeowner.

Yatrik has a house listing for INR 10,000(exclusive of GST) per night on Airbnb. It has been rented out for one night, then what is the amount Airbnb needs to pay to him?

Airbnb has to deduct INR 100 as TDS &  INR 1000 as commission; the final amount paid to Yatrik would be INR 8,900. Airbnb then has to deposit this TDS of INR 100 with the Indian Government against Yatrik’s PAN number.

If it was a resident company, TDS is required to be deducted only if annual sales exceed INR 5,00,000 in the financial year.

Note: If Yatrik does not provide PAN or Aadhaar this TDS is deducted at the rate of 5%. The TDS is deducted before GST.