Get Equalization Levy Compliant

We have helped various companies who falls under the ambit of Equalization Levy on how to maintain data and Filling Form No. 1 (Equalization Return). If Equalization return is not filed, expense gets disallowed also penalty and interest is levied.

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Equalization levy in India- Meaning

Online Advertisement Portals such as Google and Facebook are Nonresidents as per Income-tax Act and do not have permanent establishments in India. The resident assessee pays to the portals and claims it as business expenditure under Section 37 of the Income Tax act.The government of India is losing its revenue as the assessee gets expense deduction while the amount paid to the payee is not taxable in India. To avoid this, an Equalisation levy has been introduced.Equalization levy is levied in the whole of India except in the state of Jammu and Kashmir according to Section 163 of Finance Act 2016.

Applicability and Rate of Equalisation levy

According to Section 165 of Finance Act,2016 Equalisation levy at the rate of 6% is levied if payment for specified services (advertisement) is received by the nonresident from a person resident in India and carrying on business or profession or a Nonresident having a permanent establishment in India.Levy is not applicable if the aggregate amount received by the Nonresident from the payer is up to Rs. 1,00,000 in the previous year or Non-resident having a permanent establishment in India and service-connected with such permanent establishment.Also, the Equalisation levy is not applicable where the payment for the specified service by the person resident in India is not for the purpose of carrying out business or profession.Here, Specified Service means an online advertisement and any provision of digital advertising space or any other facility or service for online advertisement.

Disallowance of expense if Equalisation Levy not deducted

Any consideration paid or payable to Nonresident for which Equalisation levy is deductible and such levy has not been deducted or Levy deducted but not paid to the government up to due date of return filling then such advertisement expense shall not be allowed as deduction in current Previous year.Deduction is allowed in a subsequent year if paid after the due date of return filling.

Equalisation Levy Examples

Example 1: XYZ Ltd received advertisement services of Rs. 3,00,000 from Google. Then, XYZ Ltd needs to deduct the levy for Rs. 18,000 (3,00,000*6%) and pay the remaining amount of 2,82,000 to Google. XYZ should deposit 18,000 to Government before the return filing due date and can claim advertisement as a business expense.Example 2: Mr. A who is not engaged in any business or profession paid Rs. 1,20,000 to Facebook. He is not required to deduct the Equalisation levy since he is not engaged in any business or profession.

Collection and Recovery of Equalisation levy

According to Section 166 of the Finance Act, the Equalisation levy shall be deposited to Central Government up to the 7th of next month. If any person fails to deduct the Equalisation levy then also he is liable to pay a levy to the government.  Interest at 1% per month or part of a month shall be applicable on late deposit of levy like TDS.

Equalisation Levy Return filling procedure

Annual return in case of Equalisation levy

Every assessee has to file a return in Form No. 1 on or before the 30th June of immediately following the financial year.Belated return( Not filled before 30th June) or Revised Return (Mistake in original Return) can be done from the end of two years from a financial year in which specified service was provided.If Assessee fails to furnish the return within the prescribed time, the Assessing Officer may furnish the notice requiring him to file the return. Such return needs to be filed within 30 days of serving of notice.

Return filling procedure

  1. Log in to the income tax portal – www.incometaxefiling.gov.in 
  2. Click on “e-file” and then on “Income Tax forms”
  3. Select “Form No.1” from the drop-down for “Form Name”
  4. Select the submission mode from the drop-down – you have 2 modes of submission, one is “prepare and submit online” and the other is “Upload XML”
  5. Part A of the form will be auto-filled with details of the Equalisation levy paid in the financial year.
  6. Part B should be filled manually, this form requires details of the non-resident service provider, list of requirements are mentioned below :
    • Name and address
    • PAN if available
    • Amount of consideration for service provided
    • Date of payment/credit of the amount of consideration for specified services
    • Levy paid for such a transaction
    • Interest on late payment of Equalisation levy, if any
    • Details of penalty, if any

Penalty for Non-Compliance

If an assessee,(a) fails to deduct the whole or any part of levy as required under Section 166(b) Having deducted levy but fails to deposit it to the credit of central government in accordance with the provisions shall be liable to pay,In the case of (a) in addition to paying the levy or interest (if any), a penalty equal to the amount of Equalisation levy he fails to deduct.In the case of (b), in addition to paying levy and interest a penalty for Rs. 1,000 for every day during the failure continues, but the amount of penalty should not exceed the Equalisation levy amount.

General Note

This compliance little is complicated to handle. Many assessees who are unaware of the provisions fail to deduct the amount and end up paying the levy from their pocket. It’s better to make details of advertisement expenses from the beginning only to have a clear-cut idea over expenses.