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10th March 2022 (6 Topics)

Equalisation levy a sovereign right, FM


Recently, while justifying the 2% equalisation levy (EL) imposed by India on the supply of services by multinational enterprises, finance minister Nirmala Sitharaman said it is a sovereign right to tax revenues earned from operations in the country.


What is Equalisation Levy (EL)?

  • Equalization Levy (EL) is a tax leviable on consideration received by a non-resident for specified services.
  • Specified Service means online advertising or provision of digital space for online advertisement or any other service for purpose of online advertising.
  • Equalization Levy is imposed under the Finance Act 2016 and not as a part of the Indian Income Tax Act, 1961.
  • The Government introduced Equalization Levy vide Finance Bill, 2016, with the intention of taxing the digital transactions.
  • As per Sec 165 of Finance Act 2016, a person resident in India or a non-resident having a permanent establishment in India shall deduct EL at 6% on the consideration paid to non-resident towards specified services.

Applicability of Equalisation Levy:

  • Equalisation Levy is a direct tax, which is withheld at the time of payment by the service recipient.
  • The two conditions to be met to be liable to equalisation levy:
  • The payment should be made to a non-resident service provider;
  • The annual payment made to one service provider exceeds 1,00,000 in one financial year.

About EL (Equalization Levy) 2.0:

  • The Finance Act, 2020 expanded the scope of the EL to include all non-resident e-commerce operators providing ‘e-commerce supply or services.
  • As per the expanded provisions, with effect from 01 April 2020, a non-resident e-commerce operator is liable to pay Equalization Levy at the rate of 2% on the consideration received/receivable from e-commerce supply or services.
  • Salient features of (Equalization Levy) EL 2.0:
  • The Equalization levy 2.0 does not apply to transactions already covered by the Equalization Levy under Finance Act 2016.
  • Thus, services such as online advertisement, provision of digital space for online advertising, or related services are not subject to EL 2.0.
  • EL 2.0 is applicable on the online sale of goods or online provision of services or a combination of both by the non-resident e-commerce operator.
  • EL 2.0 is applicable where non-resident e-commerce operators supply to
    1. person resident in India
    2. Person using an Indian IP address
    3. Non-resident in specific cases.
  • The threshold limit attracting equalization 2.0 is Rs 2 Crores.
  • The EL 2.0 shall be levied only if the aggregate amount of consideration for such specified services received in a previous year exceeds Rs. 2 crores.
  • EL 2.0 is charged at the rate of 2% on the amount of consideration received/receivable by the non-resident.
  • The non-resident e-commerce operator is liable for deposit the EL amount to the Government treasury & complies with the statutory requirements viz. the filing of EL return, etc.
  • The onus of compliance cast on the non-resident e-commerce operator EL 2 is not applicable where E-commerce operator has a Permanent Establishment in India and the e-commerce supplies or services are effectively connected with such Permanent Establishment.

In October 2021, G20 countries approved a global deal to adopt a 15 percent minimum corporate tax and reallocate taxing rights for large profitable multinational enterprises (MNEs) to countries where they sell products and services.

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