Enlarging the scope of “equalisation levy”

As part of the measures to address the tax challenges posed by the increased digitalization of the economy, an “equalisation levy” was introduced by the Finance Act, 2016 on certain non-resident businesses. The levy was applied at a rate of 6% on certain “specified services”—such as online advertisement and any provision for digital advertising space or any other facility or service for the purpose of online advertisement.

The measure imposes an obligation on Indian business residents to deduct the amount of the equalisation levy on payments made for such specified services and to remit the amounts to the government.

For these purposes, an “e-commerce operator” is defined as a non-resident that owns, operates or manages a digital or electronic facility or platform for online sale of goods or the online provision of services.

The “e-commerce supply or services” on which the levy applies are:

•Online sale of goods owned by the e-commerce operator

•Online provision of services provided by the e-commerce operator

•Online sale of goods or provision of goods facilitated by the e-commerce operator (i.e., when the operator provides a platform for others to supply goods or provide services)

•Any combination of the above

The levy is applicable when the goods or services are provided / facilitated by the e-commerce operator to:

•A person resident in India

•A non-resident (in respect of sale of advertisements targeted at persons resident in India or using IP address in India)

•A person who buys goods or services using an IP address located in India

There are certain situations when the equilisation levy is not applicable. These include situations when:

•The non-resident has a permanent establishment in India and the e-commerce supply or services are effectively connected to such permanent establishment

•The equalisation levy at 6% on “specified services” (as defined above) applies to such services

•The gross receipts / turnover in respect of goods sold / services provided to residents, non-residents and persons using IP addresses in India (referred to above) is less than Rs. 2 crores in a year

Unlike in the case of the equalisation levy on specified services when the resident payer was responsible to deduct and pay the equalization levy, this levy on the e-commerce operator is the responsibility and is to be discharged by the operator itself, on a quarterly basis. Consequently, an exemption from income tax is proposed for the e-commerce operators in respect of amounts covered by the equalisation levy.

Similar to liabilities of the equalisation levy as previously imposed, this expanded levy would not be part of the Income-tax Act and, thus, would not be subject to provisions of India’s income tax treaties.