What is India’s Equalisation Levy and do you need to pay it?

As online trade becomes a dominant force in global markets, it’s important that governments around the world introduce tailored tax regulations to prevent online traders from escaping existing tax requirements. In many parts of the world, this is simply known as a Digital Services Tax (DST), which applies to digital service providers including those who run search engines and social media websites.

India implemented their own DST in 2016, known as the Equalisation Levy. This Levy has been somewhat controversial, particularly in the eyes of the US government, which introduced sanctions in response to aspects of the Levy. However, it still applies today. If you’re delivering online services to clients in India, it’s important that you understand what India’s Equalisation Levy is and how it affects your business.

What is the Equalisation Levy?

First introduced in 2016 as a direct tax to be paid by non-resident service providers offering online advertising or space for online advertising, the Equalisation Levy was designed to ensure that international providers of digital services in India still pay tax to the Indian government. The tax applies to any providers earning an annual payment of more than Rs. 1,00,000 in one financial year.

However, in 2020, the Indian Government introduced Equalisation Levy 2.0, which expanded its scope to include all online or e-commerce transactions. The US trade services objected to this expansion in scope and responded with a host of sanctions and tariffs.

The US, alongside other nations around the world including the UK, Austria, France, Italy, and Spain, have agreed to take an international approach to digital tax and signed a joint statement committing to a Two Pillar solution to digital taxation. This agreement recommends a global minimum tax rate of 15% as well as laying out a timeline for the implementation of new digital tax regulations.

However, in November this year, India’s Ministry of Finance released a statement agreeing to apply the terms of this joint statement to the EL 2.0, which means that the Indian tax authorities will withdraw EL 2.0 after Pillar One comes into effect. It’s hoped that this agreement will encourage the US to withdraw its sanctions on trade with India, once again allowing businesses in both nations to flourish.

Are you liable to pay the Equalisation Levy?

Today, India’s Equalisation Levy regulations consist of both EL 1.0 and EL 2.0.

EL 1.0 still applies only to those providers of online advertising or online advertising space, and this is taxed at 6% on online advertisement revenue of non-residents.

EL 2.0 applies to non-resident e-commerce operators who provide e-commerce supply or service to Indian residents or non-resident companies that have a permanent establishment in India. This definition includes:

• The online sale of goods
• The online provision of services
• The facilitation of the online sale of goods or the online provision of services

India’s EL 2.0 is currently charged at 2% on gross revenues received from these activities.

What impact will the Equalisation Levy have on trade?

Currently, the introduction of EL 2.0 has had a significant impact on the ability of international traders to sell goods online to Indian residents and companies at a good profit. The additional levy went above and beyond those introduced in Europe and the US, where digital tax regulations usually only apply to online advertising and similar operations.

India’s promise to meet the terms of the joint statement mentioned above, at least with regard to EL 2.0, is a good start that should help to repair trade bridges between India and the US. But this won’t come into effect until the introduction of Pillar One, which could yet be years away, and Indian taxation authorities have made no mention of whether EL 1.0 will meet the same terms.

In the short term, it’s likely small and medium businesses that will be hit hardest by India’s EL 2.0. As part of their transition into Pillar One, India has agreed to offer excess EL paid during the interim period as a credit for set-off against corporate tax liability, though only for entities falling within the revenue threshold scope of Pillar One, or 20 billion Euros. Those companies earning INR 20 million or more, but under 20 billion Euros, will still be liable to pay EL 2.0 with no opportunity to offset this against future tax.

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