Equalisation levy under Finance Act 2016

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[dropcap]S[/dropcap]ince 1 June, the country’s tax system has an equalisation levy on digital transactions in consonance with the initiative of the Organisation for Economic Co-operation and Development (OECD). It is aimed at addressing base erosion and profit shifting (BEPS). On 27 May, the Central Board of Direct Taxes (CBDT) had released rules on the newly introduced equalization levy on specified digital services. It is a tax to equalise the tax burden on remote and domestic suppliers of similar goods and services.

The evolution of the BEPS package through a continuous consultative process is expected to accelerate the pace of domestic tax law reforms.

The OECD defines BEPS as the tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. The Finance Act, 2016 (Act) has introduced equalisation levy of 6% in respect of certain specified services involving payments exceeding Rs 100,000 in the online marketing and advertising domain rendered by non-residents who do not have a permanent establishment (PE) in India.

This is in the form of a withholding obligation. The Act provides for the application of equalisation levy on business-to-business transactions between the service provider and a resident who carries on any business or profession in India or a non-resident having a PE in India (being the service recipient). The provisions of equalisation levy are not within the ambit of the Income Tax Act, 1961, but form part of a separate code contained under the Act.

Extent and commencement

  • This extends to the whole of the country except the State of Jammu & Kashmir.
  • This has come into force with effect from 1 June 2016.

Charge and applicability of equalisation levy

  • The equalisation levy shall be charged at the rate of 6% of the amount of consideration for specified services received or receivable by a non-resident from :
  1. A person resident in India and carrying on business or profession, or
  2. From a non-resident having a Permanent Establishment (PE) in India

(hereinafter referred as “specified persons”)

“Specified service” for this purpose means:

  1. Online advertisement,
  2. Any provision for digital advertising space or any other facility or service for the purpose of online advertisement,
  3. Any other service as may be notified by the central government in this behalf

When equalisation is not applicable

 

  1. If the non-resident service provider has a Permanent Establishment (PE) in India and income from such specified services is effectively connected to this Permanent Establishment (PE).
  2. Where the payment for specified service by the person resident in India (or permanent establishment in India) is not for the purpose of carrying out business or profession.
  3. If aggregate amount of consideration for specified services received or receivable by a non-resident from a person resident in India (or from a non-resident having a Permanent Establishment in India) does not exceed Rs 1 lakh in any previous year.

Deduction and payment of equalisation levy

 

  1. Every person, being a resident and carrying on business or profession or a non-resident having a permanent establishment in India (here for the purpose of equalisation levy referred to a “assessee”) shall deduct equalisation levy from the amount paid or payable to the non-resident in respect of specified services.
  2. The amount of equalisation levy so deducted by the payer has to be paid to the government by 7th day of month following the month in which the equalisation levy is collected. Even if the equalisation is not deducted, the payer is liable to pay the levy to the credit of central government.
  3. Every assessee, who is required to deduct and pay equalisation levy, shall pay the amount of such Levy to the credit of the central government by remitting it into the Reserve Bank of India or in any branch of State Bank of India or of any authorised bank accompanied by an equalisation levy challan.

Furnishing of statement

 

  1. The payer is responsible for deduction of equalisation levy shall furnish a statement in Form No. 1, duly verified in the manner indicated herein, and may be furnished by the assessee in the following manner namely:
    1. Electronically under digital signature, or
    2. Electronically through electronic verification code
  2. The statement in Form No. 1 in respect of all the specified services chargeable to equalisation levy during any financial year shall be furnished on or before the 30th June immediately following that financial year.
  3. Where an assessee fails to furnish the Statement within the specified time limit, the assessing officer may issue a Notice to such person requiring him to furnish, within 30 days from the date of service of the notice, the statement in the prescribed Form and verified in the manner indicated therein.

Processing of statement

Provisions have been made relating to processing of the value of specified services and equalisation levy payable or refundable on the basis of such processing. It further provides for computation mechanism.

It also provides that no information shall be made after the expiry of 1 year from the end of the relevant financial year.

Rectification of mistake

With a view to rectifying any mistake apparent from the record, the assessing officer may amend any intimation, within 1 year from the end of the financial year in which the intimation is sought to be amended was issued.

The assessing officer may rectify mistakes either suo motu or at the instance of the assessee.

Further, any amendment which has the effect of enhancing the liability or reducing a refund of the assessee shall be made after giving the assessee a reasonable opportunity of being heard.

Interest on delayed payment of equalisation levy

Every assessee, who fails to credit the equalisation levy or any part thereof to the credit of the central government within the prescribed period, shall pay simple interest at the rate of 1 %, of  such levy for every month or part of a month by which such crediting of the tax or any part thereof is delayed.

Penalty for failure to deduct or pay equalisation levy

Any assessee who

  • fails to deduct the whole or any part of the equalisation levy as prescribed or
  • having deducted the equalisation levy, fails to pay such Levy to the credit of the central government,

shall be liable to pay

  • in the case referred to in Clause (a), in addition to paying the Levy or interest, if any, a penalty equal to the amount of equalisation levy that he failed to deduct, and
  • In the case referred to in Clause (b), in addition to paying the Levy and interest, a penalty of Rs 1000 for every day during which the failure continues, so, however, that the penalty under this clause shall not exceed the amount of equalisation levy that he failed to pay.

Penalty

Penalty for failure of payment

  • If the equalisation levy was not deducted: The penalty is equal to the amount of the levy that the assessee failed to deduct (along with interest and the outstanding levy amount);
  • If the equalization levy was deducted but not deposited: The penalty is equal to Rs 1,000 for each day the failure continues, but not to exceed the amount of the equalisation levy that the assesse failed to pay (along with interest and the outstanding levy amount);
  • Disallowance of such expenditure in the hands of the payer (unless the defect is rectified)

Penalty for failure to file statement of compliance:

  • Rs 100 for each day the noncompliance continues

Prosecution:

  • If a false statement has been filed, the person may be subject to imprisonment of a term of up to three years and a fine.

Penalty not to be imposed in certain cases

No penalty shall be imposable for any failure, referred as above, if the assessee proves to the satisfaction of the assessing officer that there was reasonable cause for the said failure.

No order imposing a penalty shall be made unless the assessee has been given a reasonable opportunity of being heard.

Default pertaining to non-deduction / non-deposit of equalisation levy

Any consideration paid or payable (to a non-resident for a Specified Service on which equalisation levy is applicable) will be disallowed from 1 June 2016 (i.e. assessment year 2017-18) in the following cases:

  1. equalisation levy is deductible but such Levy has not been deducted
  2. Equalisation is deductible (and it is so deducted) but it is not deposited [on or before the due date of submission of return of income under section 139(1).

If, however, equalisation levy is deducted or deposited in a subsequent year, the aforesaid consideration shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid.

Notice of demand

Where any Levy, interest or penalty is payable in consequence of any Order passed under the provisions of the law, the assessing officer shall serve upon the assessee a “Notice of Demand” in Form No. 2 specifying the sum so payable;

Form of appeal to Commissioner of Income Tax (Appeals)

 

  • An appeal to the Commissioner of Income Tax (Appeals) shall be made in Form No. 3 in the following manner, namely:-
  • Electronically under digital signature, or
  • Electronically through electronic verification code
  • The form of appeal shall be verified by the person who is authorised to verify the Statement of Specified Services as applicable to the assessee.

Any document accompanying Form No. 3 shall be furnished in the manner in which the Form No. 3 is furnished.

About Jatinder Chopra

Chartered accountant with 30 years of experience in corporate finance
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