Equalisation Levy

For any service, there are one or more service providers and one or more service users. Service users have to pay a direct tax while purchasing or acquiring a service. But this direct tax is withheld at the time of payment. Equalisation levy is the answer to why taxing is so prevalent in e-commerce now and especially in India. In simpler words, the term refers to the direct tax that a business owes the government for a digital transaction.

IAS aspirants looking forward to appearing in the upcoming civil services exam must go through the aspects, features and significance of the Equalisation Levy further below in this article.

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Equalisation Levy Meaning

The IT sector of India has experienced a massive expansion in the last decade or so, thanks to the global increase in IT usage. For the IAS exam, it is very important to remember that tax within the IT sector has been introduced in India due to increasing tax challenges that the government faced.

Equalisation levy is an extremely vital tax system that enables enterprises to regulate their business models following the existing conventions. In India, there is a heavy reliance on e-commerce platforms and digital transactions. This reliance is only predicted to grow in the years to come.

For the upcoming IAS preparation, it is important to remember that tax disputes can lead to massive problems for the Indian economy, where IT is one of the most notable sectors. Tax disputes may include challenges in terms of nexus, data valuation, and user contribution. Companies with international operations are more vulnerable to these disputes.

The equalisation levy India system, therefore, has two primary conditions for the applicability of this tax. These are:

  • The service provider to whom a payment is made should be non-resident, that is, not having any permanent establishment in the country.
  • The annual payment which is made to a service provider should be more than 1 lakh rupees in one financial year.

These two conditions are important for the UPSC exam.

Equalisation Levy Services

Not all e-commerce or telecommunication services fall under the equalisation levy system since the latter is newly introduced (in 2016) and is not a part of the Indian Income Tax Act (1961). Instead, it is imposed by the Finance Act 2016, which is a bill that grants certain duties and amends the law in relation to the national debt and the aggregate public revenue. This bill, therefore, makes additional provisions within the financial model.

The two specific services that fall under the equalisation levy section in India are:

  • Online advertisements
  • Any digital space that may be further modified for advertising.

Another vital piece of information for the UPSC Prelims is that the payment for this tax, which is applicable to a non-resident service recipient, must be done by either an Indian resident on business or by a non-resident having a permanent establishment in the country.

Equalisation Levy Expansion

As of 2020, an advanced form of the equalisation levy (EL) taxing system has been enforced in India. According to this new system, issued by the Finance Act, 2020, it is crucial that all e-commerce operators who are non-residents of India be included in this direct tax.

This additional equalisation levy UPSC information is highly beneficial to students. According to this upgraded form of EL, any non-resident digital operator who is providing e-commerce services is liable to be taxed at the rate of 2 per cent. However, this rate is only applicable if and when the e-commerce supply or service considers it.

Two important characteristics of this new equalisation levy system include:

  • For transactions that the EL has already covered under the Finance Act, 2016, this new EL shall not be applied. This means that this new taxing system does not cover online advertisement and digital space provision.
  • This new EL is applied to non-resident operators within the e-commerce industry who supply to residents in India and to those who use an Indian IP address.

The threshold limit for this new tax is 2 crore rupees, as opposed to the 1 lakh rupees, which had been the threshold for equalisation levy 2016.

Other Related Links

Taxation System in India

Double Taxation Avoidance Agreements (DTAA)

Central Board of Direct Taxes (CBDT)

Direct Tax Code (DTC)

Goods and Service Tax

Taxation Laws (Amendment) Act, 2021

Frequently Asked Questions on Equalisation Levy

What is the rate of the equalisation levy issued by the Finance Act, 2016?

The EL rate under the Finance Act, 2016 had been 6%. This means that currently, a 6% tax rate is to be applied to the gross consideration to be paid.

When should an operator deposit the EL?

An operator should deposit the required EL by the first week of the month following the month when the purchase was made. The deposit should be done to the Central Government credit.

To whom is Equalisation levy 2.0 applicable in e-commerce?

The EL 2.0 is applicable to the services of:

  • An online goods sale owned by an e-commerce operator
  • Online services provisions owned and organised by an e-commerce operator

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