What is Equalization Levy?
Equalization Levy (EL) is a tax introduced by India to address the challenges of taxing digital transactions where foreign digital companies earn significant revenues from India but pay little or no tax due to not having a Permanent Establishment (PE) in the country.
Background and Purpose
- • Address base erosion and profit shifting (BEPS) by digital companies
- • Create a level playing field between domestic and foreign digital businesses
- • Capture tax on digital transactions where traditional PE rules don't apply
- • Align with OECD BEPS Action Plan 1 on digital economy taxation
The Equalization Levy was introduced through the Finance Act, 2016, and expanded significantly in 2020 (EL 2.0) to cover e-commerce transactions.
Equalization Levy 1.0 - Digital Advertising
Introduced in 2016, this applies to specified digital advertising services.
Key Features
| Aspect | Details |
|---|---|
| Rate | 6% of the gross amount |
| Nature | B2B transactions only |
| Threshold | Aggregate consideration exceeding ₹1 lakh in a year |
| Scope | Specified services (online advertisements) |
| Liability | Person making payment to non-resident |
Specified Services Covered
- • Online advertisement on digital platforms
- • Digital advertising space or facilities for online advertisement
- • Any other service notified by the government (currently none)
Practical Example
ABC Pvt Ltd pays ₹5,00,000 to Google for online advertising:
- • Advertising expense: ₹5,00,000
- • Equalization Levy @ 6%: ₹30,000
- • Total payment to Google: ₹4,70,000
- • Equalization Levy deposited with government: ₹30,000
Equalization Levy 2.0 - E-commerce Operators
Introduced through Finance Act, 2020, effective April 1, 2020, this expanded the scope to cover e-commerce transactions.
Key Features
| Aspect | Details |
|---|---|
| Rate | 2% of the gross amount |
| Nature | B2B and B2C transactions |
| Threshold | Consideration exceeding ₹2 crores in a year |
| Scope | E-commerce supply of goods/services |
| Liability | E-commerce operator (non-resident) |
E-commerce Operator Definition
An e-commerce operator is a non-resident who owns, operates or manages a digital or electronic facility or platform for the online sale of goods or services, or both.
Covered Transactions
• Online sale of goods
• Online provision of services
• Digital platforms facilitating sales
• Marketplace transactions
• SaaS subscriptions
• Digital downloads
Exclusions from EL 2.0
- • Consideration for specified services already covered under EL 1.0
- • Transactions where the e-commerce operator has a PE in India and the transaction is connected with such PE
- • Consideration not exceeding ₹2 crores in a financial year
Who Does it Apply To?
Equalization Levy 1.0 (6%)
Applicable to:
- • Indian residents making payment to non-resident
- • Non-residents with PE in India making payment to another non-resident
- • For specified digital advertising services
- • Only B2B transactions
Equalization Levy 2.0 (2%)
Applicable to:
- • Non-resident e-commerce operators
- • Providing goods/services to:
- - Persons resident in India
- - Non-residents with PE in India
- • B2B and B2C transactions
Companies Affected
Major companies impacted by Equalization Levy include:
Compliance Requirements
Equalization Levy 1.0 (6%) - Payer's Responsibility
- • Deduct 6% EL at the time of credit or payment, whichever is earlier
- • Deposit EL to government by 7th of next month
- • File Form-1 annually by June 30
- • Issue certificate to the service provider
- • Maintain records for 6 years
Equalization Levy 2.0 (2%) - E-commerce Operator's Responsibility
- • Register on IT e-filing portal
- • Collect and deposit 2% EL quarterly
- • File Form-1 annually by June 30
- • Maintain books of accounts
- • Get accounts audited if turnover exceeds specified limits
Due Dates for Deposit
| Quarter | Period | Due Date |
|---|---|---|
| Q1 | April - June | July 7 |
| Q2 | July - September | October 7 |
| Q3 | October - December | January 7 |
| Q4 | January - March | April 7 |
Return Filing Process
Form-1 Annual Statement
- • Due Date: June 30 of the assessment year
- • Filing: Online through Income Tax e-filing portal
- • Content: Details of all EL deductions/deposits during the year
- • Verification: Digital signature or EVC
Steps to File Return
Login to Portal
Access Income Tax e-filing portal
Navigate to Equalization Levy
Go to e-File → File Equalization Levy
Fill Form-1
Enter details of EL deducted/collected and deposited
Upload and Submit
Verify with DSC or EVC and submit
Impact on Businesses
For Indian Businesses (EL 1.0)
- • Additional 6% cost on digital advertising
- • Compliance burden of deduction and deposit
- • Cannot claim as expense if EL not deposited
- • Interest and penalty for non-compliance
For E-commerce Operators (EL 2.0)
- • 2% tax on gross consideration
- • Registration and compliance in India
- • May pass cost to Indian customers
- • Complex tracking of Indian transactions
GST vs Equalization Levy
| Aspect | GST | Equalization Levy |
|---|---|---|
| Nature | Indirect tax on supply | Direct tax on consideration |
| Input Credit | Available | Not available |
| Registration | GST portal | Income Tax portal |
| Applicability | All suppliers | Non-residents without PE |
International Implications
India's Equalization Levy has been a subject of international discussion, particularly regarding its compatibility with international tax principles and trade agreements.
US Response
- • US investigated EL under Section 301 (trade practices)
- • Found EL to be discriminatory against US companies
- • Imposed retaliatory tariffs on Indian exports
- • Bilateral discussions ongoing for resolution
OECD Pillar 1 & 2
- • OECD is working on a global solution for digital taxation
- • Pillar 1 proposes new nexus and profit allocation rules
- • India's EL may be withdrawn if global agreement reached
- • Transition arrangements under discussion
Frequently Asked Questions
Q: Is Equalization Levy applicable on intra-group transactions?
Yes, Equalization Levy applies to transactions between related parties if they meet the criteria (consideration thresholds and nature of transaction).
Q: Can I claim Equalization Levy as a business expense?
For EL 1.0, the EL deposited is not treated as income of the recipient, so it doesn't form part of their taxable income. For the payer, it's an additional cost. For EL 2.0, it's a tax paid by the e-commerce operator.
Q: What is the penalty for non-compliance?
Interest at 1% per month for late deposit. Penalty equal to EL amount for non-deduction. Prosecution in severe cases. Late filing penalty of ₹100 per day.
Q: Does Equalization Levy apply to SaaS products?
Yes, SaaS (Software as a Service) subscriptions provided by non-resident e-commerce operators to Indian residents are subject to 2% Equalization Levy if the threshold is exceeded.
Q: Is EL applicable on purchases from Amazon or Flipkart?
For domestic e-commerce platforms like Amazon India or Flipkart India which are resident entities or have a PE in India, EL 2.0 does not apply. GST would apply instead.
Q: How is the ₹2 crore threshold calculated for EL 2.0?
The ₹2 crore threshold is calculated based on the aggregate consideration received by the e-commerce operator from e-commerce supply of goods/services to persons in India during a financial year.
Q: Can I claim Foreign Tax Credit for Equalization Levy?
No, Equalization Levy is not covered under the Foreign Tax Credit mechanism as it is not an income tax under Section 90 or 91 of the Income Tax Act.
Q: Is EL applicable to cryptocurrency exchanges?
If a non-resident operates a digital platform for trading cryptocurrency and facilitates supply of services to Indian residents, it could be subject to Equalization Levy if the threshold is exceeded.