1. Equalisation Levy
A step towards curbing BEPS activities
1
Equalisation Levy – a step towards curbing BEPS activities
Few days ago, the Government of the United Kingdom (‘UK’) imposed a tax named “Diverted Profits
Tax” dubbed as “Google tax” at a rate of 25% for companies which avoid creating Permanent
Establishment (‘PE’) in the UK and thereby avoid paying UK corporation tax. The sole intention of Her
Majesty Revenue & Customs (‘HMRC’) was to bring entities like Google, Facebook, Amazon etc. under
its tax bracket. These entities are currently paying taxes in UK which are disproportionate from the profits
they earn from the UK.
PE means a fixed place of business through which a person is carrying on business activities wholly or
partially. Any company having a PE in a foreign country shall be liable to pay income tax in that country
on the profits attributable to the activities in that country.
Action Plan 1 (Addressing the tax challenges of digital economy) of Base Erosion and Profit
Shifting (‘BEPS’) project has been formulated and recommended by G20 countries basically to
focus on the above mentioned companies.
Some other key points of this Action Plan are as follows
 It provides for component and features of digital economy.
 It also recognizes emergence of different business models – e-commerce, app stores, online ad, cloud
computing etc. It is difficult to define digital economy and ring fence as it has itself become a separate
economy.
 The Action Plan has only provided the illustrations where the entities are engaging in base eroding
and profit shifting activities. However, it has failed to give recommendations to resolve such issues.
 It addresses to several other Action Plans. E.g. Action Plan 7 on PE status states that any activity
which forms a core / essential business activity of the entity and is intended to result in regular
conclusion of contracts shall not be considered as preparatory / auxiliary as may be in the current tax
treaties and the entity shall be considered to have a taxable presence in the country of performance of
such activities.
 It has also introduced a concept called as “Virtual PE” where the income generating activity of the
entity shall constitute its PE in the other country.
Countries like Saudi Arabia, Kuwait and Turkey have introduced provisions for Virtual PE in their
domestic laws.
Being a member of G20 nations, India has now taken a step forward in implementation of the Action Plan
1 in Income tax Act, 1961 (‘ITA’). While drafting the Finance Bill 2016, Mr. Arun Jaitley, our Finance
Minister has kept current tax challenges in mind and proposed to insert a new Chapter in ITA i.e.
“Chapter VIII on Equalisation Levy”.
Nowadays, businesses have no national boundary and can carry on their commercial activities from any
corner of the world. Along with these advancements, it brings some tax issues. It is now difficult to
analyze whether a non-resident E-commerce company has a PE in other country or not, location of
income production activity and thereby the jurisdiction having the right to tax such income.

2. Equalisation Levy
A step towards curbing BEPS activities
2
Charging Section (Section 162)
An equalisation levy at a rate of 6% shall be charged on a consideration, for rendering any specified
services by a non – resident to a resident of India carrying business or profession in India or to a non –
resident having PE in India.
Such provision shall not be applicable if aggregate amount of consideration paid by a resident of India
carrying business or profession in India or by a non-resident having a PE in India does not exceed INR 1
lakh in any previous year. This provision is to reduce the burden of small players in the digital domain.
Specified services shall include
a. Online advertisement;
b. Any provision for digital space;
c. Any other facility or space for online advertisement; and
d. Any services as notified by the Central Government
These provisions shall not be applicable for Flipkart, Snapdeal etc. who are residents of India by virtue of
being companies incorporated in India and any payment to them for the above mentioned specified
services shall not be chargeable for equalisation levy.
Collection and recovery of equalisation levy (Section 163)
Any resident of India carrying business or profession or non-resident of India having PE in India
(hereinafter collectively called as ‘payer’) shall be liable to deduct equalisation levy from the
consideration amount for specified services.
The equalisation levy on specified services provided in a month shall be credited in the treasury of the
Central Government of India by the 7th
of the immediately succeeding month by the payer.
Furnishing of statement (Section 164)
Every payer shall be liable to furnish a statement in respect of specified services in a prescribed format to
the tax authorities after the end of the financial year in which such services were provided.
The payer can furnish the statement till the expiry of two financial years from the end of the financial year
in which services were provided if
a. The payer has not furnished the statement within the prescribed time limit; or
b. The payer notices any mistake or wrong particulars in the submitted statement.
Processing of statement (Section 165)
The concerned tax authorities may generate an intimation for amount payable or refund after calculating
equalisation levy liability ,computed interest (if any) on delayed payment of the levy, etc within the
expiry of one year from the end of the financial year in which services were provided.
Rectification of mistake (Section 166)
Amendment to intimation under Section 165 for any mistake noticed by the tax authorities or suo motu
brought to their notice by the payer shall be given effect within one year from the end of financial year in
which such intimation was issued.

3. Equalisation Levy
A step towards curbing BEPS activities
3
Interest and penalty provisions
Section Particulars Amount
167 Interest on delayed payment of equalisation
levy
Simple interest at the rate of 1% of such
levy for every month or part of a month
by crediting was delayed
168 The payer failing to deduct equalisation levy
at an appropriate rate
Penalty equal to the amount of
equalisation levy that he failed to deduct
168 The payer failing to credit equalisation levy
after deducting from the consideration paid
Penalty of one thousand rupees for every
day during which the failure continues.
The amount of penalty shall not exceed
the amount of equalisation levy that the
payer fails to credit
169 Penalty for failure to furnish statement Penalty of one hundred rupees for each
day during which the failure continues
Penalty not to be imposed in certain cases (Section 170)
It should be noted that no order imposing a penalty shall be made unless the payer has been given a
reasonable opportunity of being heard.
It should also be noted that any payment made by resident individuals to such non-resident companies
shall be exempt from equalisation levy provisions.
Disallowance of expenses (Section 40(a)(ib))
The amount of consideration paid to non-resident for specified services by the payer on which
equalisation levy was deductible but was not deducted as prescribed under the provisions of Chapter VIII
shall be disallowed while computing the total taxable income of the payer under the provisions of ITA.
Exempt income (Section 10(50))
The income arising from such specified services on which equalisation levy is chargeable shall be exempt
in the hands of the recipient while computing the total taxable income of the recipient. Such provision has
been inserted to avoid double taxation on the income arising from provision of specified services.
____________________ XXX ____________________
By Anuj Rajendra Prasad Biyani
(Staff Accountant in B S R & Co. LLP)
Mumbai