Equalization Levy: Meaning

The income tax law imposes levies based on place of residence of the taxpayers and /or their source of income, such laws were originally conceptualized with brick-mortar business in mind. However, the same is being initiated by the Indian Policy makers to be shifted to levying of the taxes also on the digital economy. As the digital economy is one of the most flourishing mode of business and yet are easily evaded via the conventional concepts and as a result digitally running business frameworks have opportunities to circumvent tax laws and set operations to minimize tax liability.

Hence, the policy makers introduced the Equalisation levy in 2016 and the same was part of the Financial Bill, 2020. The Equalisation Levy refers specifically to the tax imposition of 2% on the digitally provided goods, services by the non-residents of India and the services/goods are supplied to the IP addresses routed to the residents/users within India.

Equalization Levy In Comparison To Taxation Levy Of Other Nations

 In similarity to the Equalisation levy, a similar Digital Services Taxation scheme is in practice in UK and other European nations. Those policies have been elaborately been explained with respect to the general issues of whether the taxes would be charged upon the gross revenue or on the net profit earned. However, the Equalisation Levy in India is still silent on such assumptions and only caps the threshold of the transaction to be Rs.2 crore and the said threshold is levied across globe carrying out business transactions in India.

Another aspect that has not been clearly laid down neither in the Finance Bill, 2020 or Finance Bill, 2021 and the same is non determinable from the Terms of the Income Tax Act. The aspect relates to the taxation with unilateral measures or multilateral transactions. Further, the same if compared to the policies laid down by OECD (Organization of Economic Co-operation and Development) and in consonance with the same, the UK DST in order to avoid the confusion with respect to the unilateral transaction or multilateral transaction tax imposition has laid down DST on 50% of revenue.

Another important aspect to be considered as the same is not clarified by the policy makers/Government in the Financial Bill, 2020 and 2021as well. This refers to the taxation consideration for intermediary platforms that work in lieu of commission from registered seller or buyer or both. Also, the important point of consideration is the surety of the IP Address where the services or the goods are sold are provided at the locations within the territory of India. However, the major concern for the determination of the same arises due to the virtual private networks as they play a considerable role in disguising IP addresses and location of the end user.

Explanation Of Application Of Equalisation Levy As Per The Financial Bill 2021

Despite various remittances of the non-clarity, in the financial Bill, 2021 light has been given on certain gray aspects of the Equalisation levy and it's enforceability.

The Financial Bill 2021 clears to the fact that the Equalisation levy extends it's application even to companies that do not own the goods or provide the services on their platforms and if any part of the transactions is online even if it just an online payment, it will be taxable as per the Equalisation levy. However, the royalty and fees for technical services is excluded from the levy and instead will be taxed a 10 percent only.

The Finance Bill also clearly laid down that for the purpose of defining ecommerce supply or service, online sale of goods and online provision of services shall include one or more of the following online activities, namely: acceptance of offer for sale; placing of purchase order; acceptance of the purchase order; payment of consideration; or supply of goods or provision of services, partly or wholly.

It further lays down that the levy charges apply on the entire consideration but the term consideration has not been elaborately explained neither in the Financial Bill nor in the Income tax act but have laid down a threshold of Rs. 2 crore on the transactions which is very moderate and applies equally to all e-commerce operators across the globe having business in India.

The Financial Bill lays light expressing clarification that the transactions taxable under income tax are not liable for equalization levy. Further, it is also proposed to clarify regarding the applicability of equalization levy on physical/offline supply of goods and services.

Hence, the financial Bill has provided clarity on definition of e-commerce supply or service saying these will include one or more of online activities, including acceptance of offer for sale; placing the purchase order; acceptance of the purchase order; payment of consideration; and supply of goods or provision of services (partly or wholly).

This amendment will take effect from April 1, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.