What is the equalisation levy, what specific services are impacted and what are the exemptions? Here's a refresher on India's tax on business-to-business transactions in the digital advertising space.

The world has long moved on from bricks and mortar denoting a place of business. No longer does a business need to have a storefront or an office in a country in order to trade there, and the digital economy continues to innovate what it means to be a business in the modern age.

Yet as remote presence takes centre stage and digital businesses become more strategic about where they base their headquarters (HQ) for tax purposes, governments around the world throw their hands in the air. How do these businesses working and trading in their country get pinned down? How can governments ensure there is no unfair advantage between traditional and digital businesses if existing regulation means the digital business pays less tax?

India's finance minister introduced an equalisation levy to tax digital economy transactions on 29 February 2016, as part of his budget proposals. The levy forms part of India's response to the OECD's BEPS (Base Erosion and Profit Shifting) agenda, but came as somewhat of a surprise given India's boom in digital businesses. No surprise, then, that the levy has proven a boon to government coffers, garnering as much as ₹550 crore in 2017-18.

What is the equalisation levy?

The equalisation levy of 6% is aimed at taxing business-to-business transactions in the digital advertising space - that is, the income accruing to foreign ecommerce companies from within India. It's a direct tax which is withheld at the time of payment by the recipient of the services. 

The equalisation levy is payable on any specified service received or receivable by a non-resident, though it should not be charged where:

  • the non-resident providing the specified service has a permanent establishment in India and the specified service is effectively connected with such permanent establishment
  • the annual accrued payments made to one single service provider do not exceed Rs. 100,000 in one financial year
  • the service is not for business purposes.

Which specified services are impacted?

This new tax is levied on non-resident digital advertising companies, but it doesn't cover all services. Currently the specified services covered are online advertisements, and any provision for digital advertising space or the facilities for the purpose of online advertisements.

So, if a company resident in India takes out advertising on, say, Facebook or Google on a regular basis, and the cost of advertising on one platform exceeds Rs. 100,000 in a single year, then the resident company must withhold the equalisation levy and pay it to the government.

Exemptions to the equalisation levy

There are exemptions, though:

  • if the non-resident providing the digital service has a permanent establishment in India and the service provided is effectively connected with that permanent establishment – ie., if the service provider is a taxable Indian entity
  • if the payment for services is not for the purposes of carrying out a business or profession – ie., advertising for personal reasons.

There are also provisions for small players in the digital domain. It's best to seek the views of a local expert tax partner to determine eligibility.

What's required?

The burden of paying the equalisation levy falls to the company resident in India. The Indian payer must withhold the 6% levy from payment to a non-resident for the specified services. They must then remit any levy withheld during a calendar month to the central government by the seventh day of the month that immediately follows the calendar month in which the levy was withheld, apart from in March when the due date for payments is 30 April. 

Let's take that same example from before. An Indian resident company plans to take out advertising on Facebook to the value of Rs. 9000. That will exceed the annual threshold, so the advertising paid in, say, June must have the equalisation levy withheld, and that levy then paid to the central government by 7 July. 

There are, of course, reporting obligations and penalties for non-compliance, so it pays to remain up to date on progress with the equalisation levy.

The Indian resident company paying the levy must file an electronic annual statement providing details of payments made to non-residents for these digital services, as well as details of any equalisation levy withheld and deposited with the government. This statement must be filed by 30 June immediately following the financial year (1 April to 31 March).

These statements may be audited by the tax authorities, and in the event of non-compliance the penalties include interest and fines.

Help is available

The very nature of digital advertising services is that you don't need to be in-country to perform the service - that's why the equalisation levy was introduced, after all. But if you're not in India, the task of keeping up to date with regulation and ensuring compliance becomes trickier. Working with a partner on the ground can ease the compliance process and help ensure your digital business can keep trading.

TMF Group has offices across India and across the world, meaning we can work with you where you are and where you're doing business. Our experts provide back office support to businesses large and small. Whether you want to set up a new venture in India or just want to streamline your Indian operations, talk to us about the impact of the equalisation tax on your business, and how you can remain compliant.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.