The aim of the Equalization Levy is to tax incomes that would otherwise not be taxed in India on account of geographical factors. It is no secret that online advertising spends in India have risen on account of greater digital penetration and increased use of the web as a credible advertising medium. The biggest beneficiaries of the increase in this expenditure have been online advertising companies (Facebook, google etc.) who have seen their revenues from India steadily rise.
Thanks to their presence outside India, Facebook and other such companies did not have to pay any tax in India neither were they subjected to any withholding taxes on their incomes, as we had previously discussed in this post here, since no element of the performance of the requested service ( advertising) is executed in India, the said income cannot be attributed to the operations of Facebook in India and due to the lack of a PE in India of the entity no tax is applicable on the said income in India.
The government has put an end to this free run for global advertising companies and has proposed to levy an “equalization levy” of 6% on specified services which are availed by Indian residents from Non resident providers. Specified services in this case include online advertisement, any provision for digital advertising space or any other facility or service for online advertisements.
This levy would need to be collected by the person making the payment much like withholding tax and paid similarly into the governments account on a monthly basis provided the sum being paid to the non resident exceeds or is going to exceed Rs 1,00,000 in the relevant financial year.
Interest at the one percent per month and penalties on non deduction to the tune of the amount of levy have been proposed in the finance bill to keep people in charge of making such payments honest. Further it has been proposed to amend certain sections ( Section 40 of the act) to allow the expenses on which such equalization levy is impose-able as deduction only in the year in which such levy has been paid to the government.
To make things easier for the foreign providers who will have to bear the brunt of this levy, an amendment has been made in section 10 of the act to ensure that the incomes on which such equalization levy has been deducted and paid shall be considered exempt in India. The intention of the legislature is clear in that the equalization levy is going to be a separate levy and not constrained by the various double tax avoidance agreements that India has with other countries.