Important Keyword: Advertising, digital tax, E-commerce, Equalization Levy.

Chapter VIII Finance Act: Equalization Levy

India took a significant step in 2016 with the introduction of the Equalization Levy. This levy aimed to address the challenge of taxing digital transactions conducted by non-resident companies within the country’s borders.

Prior to this, many companies operating in India had established headquarters in tax havens, effectively avoiding taxation in the country despite deriving significant revenue from Indian consumers.

In response to this, a recent update to the Equalization Levy has been implemented, imposing a 2% tax on e-commerce sales made by non-resident companies targeting Indian residents. This measure serves multiple purposes: it boosts tax revenue for the government and levels the playing field for local businesses that are subject to taxation in India due to their physical presence.

6% Equalization Levy on Online Advertising Revenue made in India

Another important aspect of the recent update to the Equalization Levy pertains to advertising services. Any advertising services sold in India by a non-resident company will now incur a 6% levy. This levy is to be deducted by the payer before making payment to the advertising company.

It’s worth noting that this levy applies only if the cost of the advertising services exceeds INR 1,00,000 in one financial year. This measure ensures that larger transactions are appropriately taxed, contributing to the overall tax revenue of the country.

Let’s illustrate this scenario:

If Aishwarya, an Indian resident, purchases Google Ads for INR 2,00,000, she will need to deduct 6% of this amount before making the payment to Google for their advertising services.

So, 6% of INR 2,00,000 is INR 12,000.

Therefore, Aishwarya will pay Google INR 1,88,000 for the advertisement services and deposit INR 12,000 with the government as part of the equalization levy.

This ensures compliance with the regulation requiring the deduction of the levy on advertising services exceeding INR 1,00,000 in one financial year.

2% Equalization Levy on non-resident E-commerce platforms selling in India

The recent clarification from the Government brings clarity regarding the taxation of non-resident e-commerce companies engaged in advertising activities in India. While such companies are subject to a 2% tax on their e-commerce turnover exceeding INR 2 crore, the scenario differs for their advertising revenue.

If an e-commerce company participates in online advertising in India, it falls under the 6% levy instead of the 2% slab applicable to their e-commerce turnover. This means that any advertising revenue generated by such companies will be subject to a 6% levy, ensuring they do not benefit from the lower 2% tax rate applicable to their goods and services.

Let’s illustrate this with an example:

Consider Amazon, a non-resident e-commerce platform, which has made e-commerce sales totaling INR 50 crores in the Indian market. According to the 2% levy, Amazon would pay INR 1 crore (2% of INR 50 crores) to the Indian Government, leaving them with INR 49 crores in revenue.

Previously, Amazon would retain the entire INR 50 crores as revenue without paying any taxes in India. However, with the implementation of the equalization levy, Amazon now contributes INR 1 crore to the Indian Government as part of the taxation on its e-commerce turnover.

TDS U/S 194O is deducted on any sale made in India

In addition to the equalization levy, non-resident companies are also subject to Tax Deducted at Source (TDS) under Section 194O. Unlike the equalization levy where the tax burden falls on the non-resident company, in the case of TDS u/s 194O, the burden falls on the non-resident e-commerce operator, who deducts TDS from the payment made to the resident e-commerce participant (seller) and deposits it with the government. TDS is calculated on the gross amount (exclusive of GST).

Let’s illustrate this with an example involving Airbnb, a non-resident company, and Yatrik, an Indian resident:

Yatrik lists his house on Airbnb for INR 10,000 per night (exclusive of GST). If the house is rented out for one night, Airbnb collects the payment from the guest and deducts their commission of 10% before paying the homeowner.

Example

Total payment by the guest: INR 10,000 Airbnb’s commission (10% of INR 10,000): INR 1,000 TDS to be deducted (1% of INR 10,000): INR 100 Amount paid to Yatrik after deduction (INR 10,000 – INR 1,000 – INR 100): INR 8,900 Airbnb is then required to deposit the TDS amount of INR 100 with the Indian Government against Yatrik’s PAN number.

It’s important to note that if Yatrik does not provide PAN or Aadhaar, the TDS is deducted at the rate of 5%. Additionally, the TDS is deducted before GST is applied.

Moreover, if Yatrik were a resident company, TDS would only be required to be deducted if annual sales exceeded INR 5,00,000 in the financial year.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/