Equalization Levy under the Income Tax Act, 1961

AVS Delhi
2 days ago
4 min read

1. Introduction

The Equalisation Levy is a direct tax introduced by India to tax income accruing to non-resident companies from digital transactions with Indian customers or users, where the non-resident does not have a permanent establishment (PE) in India. It is contained in Chapter VIII of the Finance Act, 2016, and related rules, rather than the Income Tax Act, 1961, itself, but interacts with it via Section 10(50).

Transactions subject to equalisation levy

A) Sum received or receivable by a non-resident for online advertisement services Equalisation levy is charged at the rate of 6% from the consideration paid or payable for the services in the nature of online advertisement, provision for digital advertising space, any other facility or service for the purpose of online advertisement.

B) Sum received or receivable for e-commerce supply of goods or services made or facilitated on or after 01-04-2020 but before 01-08-2024. Equalisation levy is charged at the rate of 2% from the consideration received or receivable for the e-commerce supply or services made or facilitated on or after 01-04-2020 but before 01-08-2024 by an e-commerce operator.

2. Objective

Tax digital transactions where the income escapes taxation due to lack of physical presence of the foreign enterprise in India.
Ensure a level playing field between domestic and foreign digital service providers.
Widen the tax base in the context of the growing digital economy.

3. Legal Framework

The Equalization Levy is not part of the Income Tax Act, 1961, but is governed by Chapter VIII (Sections 163 to 180) of the Finance Act, 2016. However, its provisions are closely linked with the Income Tax Act for compliance and reporting purposes.

4. Applicability and Scope

A. Equalization Levy on Online Advertisement (Introduced in 2016)

Rate: 6%

Applicable on: Payments made to non-resident service providers for online advertisement or digital marketing.

Applicable only when:

The payment is made by a resident carrying on business or profession or a non-resident with a permanent establishment in India, and

The aggregate amount of consideration in a financial year exceeds ₹1 lakh.

Example: If an Indian company pays Google (Ireland) ₹5 Lakh for online advertising, it must deduct 6% (₹30,000) as equalization levy and pay the balance to Google.

B. Equalization Levy on E-commerce Supply or Services (Introduced in 2020)

· Rate: 2%

· Applicable on: The amount received or receivable by a non-resident e-commerce operator from:

o Sale of goods or provision of services to Indian residents, or

o Sale of ads targeted at Indian users, or

o Sale of data collected from Indian users.

Key Exclusions:

· If the e-commerce operator has a permanent establishment (PE) in India and the transaction is effectively connected to that PE.

· If Equalization Levy under 6% is already applicable on the same transaction.

· If annual sales are less than ₹2 crore.

5. Payment and Compliances

Particulars	Levy @6% (2016)	Levy @2% (2020)
Who pays	Resident or PE in India (Payer)	Non-resident e-commerce operator
Rate	6%	2%
Threshold	₹1,00,000 per year per payee	₹2 crore annual turnover
Due date of payment	7th of next month	Quarterly (7th July, 7th October, 7th January, 31st March)
Statement of Compliance	Form 1 (by 30th June of next FY)	Form 1 (by 30th June of next FY)
Penalty for delay	Interest @1% per month + Penalty	Same as above

6. Treatment under Income Tax

Income on which Equalization Levy is charged, exempt U/s 10(50) of the Income Tax Act, 1961.

Therefore, non-residents are not required to pay further income tax on such income in India.

7. Penalties and Late Fee

· Failure to deduct/pay levy: Penalty equal to the amount of levy.

· Late payment: Interest @1% per month or part thereof.

· Failure to file statement (Form 1): ₹100 per day of default.

8. Consequences

Such expenditure may be disallowed under Section 40(a)(ib) if the levy is not deducted and paid.

9. Current Challenges

Determination of what constitutes “digital services.”
Overlap with GST and other indirect taxes.
Difficulty in tracking cross-border online transactions.
Global debate under OECD’s BEPS (Based Erosion and Profit Sharing) Pillar One framework on digital taxation.

10. Case Laws - Example

Google Asia Pacific Pte Ltd v. CIT (Writ petition before Delhi High Court – Interim order)

Facts

A Singapore based entity (Google Asia Pacific Pte Ltd) provided cloud services to an Indian entity (Google Cloud India).
The Indian entity deducted tax at source under the Income-tax Act / DTAA at 10% (India-Singapore DTAA). The Singapore entity argued that as EL (2 %) was already paid (on cloud services from 1 April 2020 chargeable) the additional 10 % withholding would lead to double taxation.

Issue

Interplay between EL regime (Finance Act) and withholding tax under Income-tax Act/DTAA: whether tax should be withheld at full 10% or reduced by the 2% already paid as EL.
Whether EL payment qualifies as tax credit for purposes of withholding or DTAA relief.
More broadly, whether EL covers the same transaction as royalty/FTS which would attract withholding under DTAA.

Holding / Interim Order

The Delhi High Court, as an interim measure, directed that payments could be made to the Singapore entity subject to 8% withholding tax (instead of 10%) because 2% EL had already been paid on the services.
The Court emphasised that this was an interim measure and did not decide the merits of characterisation (whether the payment was royalty/FTS or covered by EL).

Practical Take-aways

The case highlights a key risk: double taxation (EL + Income-tax withholding) unless the regimes are harmonised or relief given.
Until final adjudication, payers and payees should consider interim measures and structure payments carefully.
For non-resident service providers, EL payment may not automatically allow credit under DTAA if EL is not treated as “income tax” in the home jurisdiction.
When dealing with cross-border digital services, assess both EL regime and traditional tax treaties/withholding obligations, and consider relief provisions or liability mitigation.

11. Conclusion

The Equalization Levy marks India’s proactive step towards taxing the digital economy, ensuring that multinational online businesses contribute their fair share of tax. However, with ongoing international discussions on global digital tax frameworks, the scope and structure of the levy may evolve in the coming years.

12. Note:

The equalisation levy in India is no longer applicable as of April 1, 2025, when the remaining 6% levy on online advertising was abolished by the Finance Act, 2025.

The 2% levy on e-commerce operators had already been withdrawn effective August 1, 2024.