Changes in Equalisation Levy in Budget 2021

Equalisation Levy was introduced in India in 2016, with the intention of taxing the digital transactions i.e., the income accruing to foreign e-commerce companies from India. It was aimed at taxing business to business transactions and was applicable to consideration received or receivable for specified services provided.

Finance Minister Nirmala Sitharaman proposed many new measures in the Budget 2021 to prop up the declining economy amid the Covid-19 pandemic and boost spending across sectors. Budget 2021 focused on the seven pillars for reviving the economy – Health and Wellbeing, Physical and Financial Capital and Infrastructure, Inclusive Development for Aspirational India, Reinvigorating Human Capital, Innovation and R&D, and Minimum Government Maximum Governance. Several direct taxes and indirect taxes amendments were also proposed. Let us learn more about the clarifications that were brought about for Equalisation Levy in Budget 2021 in this article.

What do you mean by Equalisation Levy?

Equalisation Levy is a direct tax, which is withheld at the time of payment by the service recipient. The following conditions are to be met to be liable to equalisation levy:

The payment should be made to a non-resident service provider
The annual payment made to one service provider exceeds Rs. 1,00,000 in one financial year.

The Equalisation Levy is levied on gross receipts from e-commerce supply. Further, the Equalisation Levy is outside the ambit of income tax as it was introduced through Finance Act, 2016, and is therefore not covered by double taxation avoidance agreements (DTAAs). Consequently, non-residents subjected to Equalisation Levy cannot claim relief under DTAAs and will not be entitled to credit for Equalisation Levy paid in India in their country of residence.

What is the charge of Equalisation Levy?

The charge of equalisation levy shall be at the rate of 6% of the amount of consideration for any specified service received or receivable by a person, being a non-resident from:

a person resident in India and carrying on business or profession; or
a non-resident having a permanent establishment in India

What is the applicability of Equalisation Levy on e-commerce operators?

From the 1st of April, 2020, equalisation levy was charged at 2% of the amount of consideration received/receivable by an e-commerce operator from e-commerce supply or services made, provided or facilitated by it:

To a person resident in India
to a non-resident in the specified circumstances
to a person who buys such goods, services or both using internet protocol address located in India

Specified circumstances as mentioned in the 2^nd point means:

sale of advertisement, which targets a customer, who is a resident in India or a customer who accesses the advertisement though internet protocol address located in India; and
sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India

An E-Commerce Operator is a non-resident who owes, operates or manages, a digital or electronic facility or platform for online sale of goods or online provision of services or both. E-Commerce Supply or Services is the 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 services or both facilitated by the e-commerce operator or any combination.

Budget 2021 added a new explanation to Equalisation Levy

Non-inclusion of royalty

Consideration received or receivable for specified services and e-commerce supply or services shall not include consideration which are taxable as royalty or fees for technical services in India under the Income – tax Act. They would still be taxed at a higher rate of 10%

Online Sale or Provision of Service

“Online sale of goods” and “online provision of services” shall include one or more of the following activities taking place online:

Acceptance of offer for sale
Placing the purchase order
Acceptance of the Purchase order
Payment of consideration or
Supply of goods or provision of services, partly or wholly

The clarification suggests equalisation levy would even cover any businesses that have an e-commerce model, pure e-commerce model, marketplace model and an intermediary as well. Offline transactions that may have even a minor digital element, could be potentially covered.

Levy to apply on entire sale amount

Consideration received or receivable from e-commerce supply or services shall include

Consideration for sale of goods irrespective of whether the e-commerce operator owns the goods; and
consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator.

This means that the entire value of goods or services would be taxed even where the goods or services are provided by a person other than the aggregator.

The clarifications will have a retrospective effect and will be applicable from April 1, 2020, as per the Finance Bill

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