Equalisation levy insights: Understanding the concept

27 Jun 2022 | Finance

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Hooshang Bakht

Brego Business was started with a mission to make entrepreneurship easy. Our goal is to help business owners grow and scale without having to deal with the day-to-day stress of running a business. We specialize in providing services that help business owners grow their businesses, including Digital Marketing, search engine marketing (SEM), social media marketing (SMM), LinkedIn marketing, video production, accounts receivable (AR), accounts payable (AP), internal audit, VCFO, and recruitment. We have helped more than 500 brands grow their businesses. We work closely with clients to understand their unique needs and develop customized strategies that deliver measurable results.

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Equalisation Levy

Equalisation Levy – Features, Applicability & Penalty

Advertising on Social Media is a common function for every business in India, irrespective of their Size, Sector and, the Value of the company. There may be many reasons why you as a business owner are currently advertising on Social Media. You may be advertising to drive traffic to your website, to publicize your online content or to search for a new employee or even simply trying to build awareness about your brand. Be it any intention, while advertising on the internet, Equalisation Levy is a tax that you have to be aware of!

What is Equalisation Levy and Why is it important for you as a business owner?

Equalization Levy is another form of direct tax, similar to TDS, which needs to be withheld by the recipient of service at the time of making payment to non-resident service providers under specific conditions. In simple words, if your company uses digital advertising services of non-resident companies like Google, Facebook, Instagram, Twitter, etc. (something that almost every business in India does), you will have to pay an equalisation levy to the government.

Why was Equalisation Levy introduced?

Equalisation Levy was introduced in India in 2016, with the intention of taxing all digital transactions, to keep an eye on services provided by foreign companies over the internet and utilized by businesses located in India. The government realized that companies who provided services digitally, cost them a huge loss of revenue, as the amounts being paid by Indian businesses were not being taxed in the hands of the recipients, due to them not being registered in India or not having a permanent establishment in India. In order to curb this, equalization was introduced, thus making it compulsory for businesses availing specific services from non-resident service providers responsible to deduct 6% tax prior to making the payments to them and depositing the same with the government. Just to put into perspective how important this revenue collection was, last year, the government collected more than Rs. 1000 Crores in Equalisation Levy! Yes, that much.

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How do I know if the Equalisation Levy applies to me?

This is by far the most important question. Does this tax apply to my business? Well, that depends. It is important to remember that not all businesses have to pay this tax to the government. This is because there are certain conditions that make a business applicable to the equalisation levy.

The First condition is that the company whose services you are paying for must be a non-resident service provider. Therefore, if you are using the services of companies like Facebook, Twitter, Instagram, etc, you are automatically liable to pay this tax. On the other hand, if you are using the digital advertising services of an Indian company that is established, you wouldn’t have to pay equalisation levy.

The second criterion that makes you applicable to this is if the payment you make for such a service exceeds Rs. 1,00,000 in one financial year. This means that if you use 1 lakh worth of Facebook Ads Services in one year, you will have to pay this tax. But if you manage to spend less than that, you don’t have to worry about paying the government.

When is the due date of this tax?

Let us assume that you paid for all the digital advertising services that you used on the 15th of February. Therefore, you have to make sure that you deposit this tax with the government authorities by 7th March and file the statement for the same on or before 30th June.

What happens if you don’t pay this in time?

In case there is a delay in the payment of this tax, interest is charged at 1% of the outstanding levy for every month. The compliance procedure for the Equalisation Levy is the responsibility of the service recipient.

The Equalisation Levy, if not deducted, will lead to a Penalty charge that is equal to the amount of levy that has failed to be deducted. If you manage to deduct the Equalisation Levy but fail to deposit it, there will be a Penalty equal to INR 1,000 per day, subject to a maximum of the levy failing to be deducted. There is also a Penalty for failure of filing the statement of compliance, that is, you will have to pay Rs. 100 per day for each day that the non-compliance continues. If there is a case of a false statement that has been filed, then there are chances of Prosecution wherein you may be subjected to imprisonment for a term of 3 years and will be asked to pay a fine.

Equalisation Levy is one of the lesser known taxes in India. Online Advertising is one of those services that everyone uses but most people are unaware of the tax that comes along with it. We at Brego Business make sure that not only our accountants but also our customers are well aware of the different changes and new additions to the taxes in India. It is important for you as a business owner to understand and know about a tax that is levied for digital advertising because of how often you use it.

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Frequently asked questions

1)What is an equalisation levy?

An equalisation levy is a tax on cross-border digital services provided by non-resident companies to Indian residents.

2)When was the equalisation levy introduced in India?

The equalisation levy was introduced in India in 2016 as part of the Finance Act.

3)Which companies are subject to the equalisation levy?

The equalisation levy applies to non-resident companies that provide digital services such as online advertising and e-commerce platforms to Indian residents.

4)How is the equalisation levy calculated?

The equalisation levy is calculated at a rate of 2% on the gross value of the services provided by non-resident companies to Indian residents.

5)What is the purpose of the equalisation levy?

The purpose of the equalisation levy is to ensure that non-resident companies pay their fair share of taxes in the countries where they operate.

6)Is the equalisation levy applicable to all digital services provided by non-resident companies?

No, the equalisation levy is only applicable to certain digital services provided by non-resident companies such as online advertising and e-commerce platforms.

7)How does a non-resident company comply with the equalisation levy?

A non-resident company must register with the Indian tax authorities and pay the equalisation levy on a quarterly basis.

8)Can the equalisation levy be deducted as an expense for tax purposes?

No, the equalisation levy cannot be deducted as an expense for tax purposes.

9)What happens if a non-resident company fails to comply with the equalisation levy regulations?

If a non-resident company fails to comply with the equalisation levy regulations, it may be subject to penalties and fines.

10)Is the equalisation levy applicable to Indian companies providing digital services to non-resident customers?

No, the equalisation levy is not applicable to Indian companies providing digital services to non-resident customers. It only applies to non-resident companies providing digital services to Indian residents.