Why Equalisation Levy was Introduced by Modi Government?



Many Online Advertisement portals (e.g Facebook, Google, Twitter, Instagram) are Non-Residents and do not have permanent establishment in India. Many resident assessees make payment to Facebook/Google Advertisement & claim as Business Expenditure u/s 37.  Now India is losing its revenue since payer gets the deduction & amount received by payee is not taxable, so Modi Government via Finance Act 2016, w.e.f 01/06/2016 introduced new concept of Equalisation Levy. India is the first country(even before USA & England) which has implemented this concept.


Taxability of any foreign enterprise in any country depends upon either of the two factors.

a) Doing business with that country

b) Doing business in that country


So if a company is doing business with that country, the income so generated shall be taxed in its home country. This concept is known as Taxation as per Residence Rule.
But if a company is doing business in the country, then besides being taxed in the home country on the basis of Residence rule, its income shall also be taxed in the host country. It is known Taxation as Source Rule.

Residential Status of a Company (Section 6)  

Company shall be considered as a Resident in India
a) If It’s an Indian Company, or,

b) Its Place of Effective Management (POEM) is in India

Poem here means, place where key managerial and commercial decisions which are necessary for the conduct of the business are taken place.

Taxation of Non Resident In India

As per DTAA’s

Income of a NR received from India shall be taxable In India only if NR has a Permanent Establishment (PE) in India. In other words, if a NR does not have a PE in India then Income Earned from India shall not be taxable in the hands of NR.

The above provision shall not be applicable with respect to Income earned in the following manner (Section 9 and Section 115A):

a) Income earned by way of Royalty
b) Income earned by way Interest
c) Income earned by way of Fees for Technical Services (FTS)

It shall always be taxed as per Source Rule. It means The above Income shall be taxed In India only.   

As per Business Connection of Income tax Act (Section 9(1)(i))

If a NR has a Business Connection in India, then its income earned from India shall be taxable In India.

If India has entered into DTAA with other countries, then as per section 90, provision of DTAA or Income Tax, whichever Is more beneficial to the assessee (NR) shall apply.


In 21st century, Cross border transaction or International transactions takes place through following ways:
In physical world, national boundaries hold its importance.  The location of the buyer and seller is known. Also there is a physical delivery of the goods. So the tax jurisdiction is easy to determine i.e. in which country such an income should be taxed. Therefore, the source rule and residence rule comes into picture. 

Through Internet, it may not be necessary that every transaction will result in physical delivery of the Goods. For instances, computer software, music, movies, using Facebook, Twitter, etc.
Therefore Geographical boundary holds no significance in these situations.

Taxation issues related to E-commerce

Transaction through internet requires two things, satellite and server.
With satellite being kept in space and server in tax heaven countries it becomes a challenge to tax such transaction.
For instance, XYZ an Indian company is advertising through facebook. Now the facebook has earned this income From India. But it will not going tax due to the concept of PE. No PE in India No Tax shall be levied in India. And since the server is kept in tax heaven countries, where mostly there is no tax, Facebook escape from paying taxes.

OECD recommendation under Action Plan 1 of BEPS MODEL

Therefore to curb such challenges faced by the modern economies, OECD Recommended the followinG:-

India Adopting the recommendations made by OECD

ed the concept y through Finance Act 2016

I hope this article will help in understanding the purpose behind equalization levy.

 [Source: ICAI Study Materials  & VG Study Material]

-By Reshu Maheswari

Mail at reshumahe05@yahoo.com
For further information contact at info@commerceinsiders.com
!! Thank You  !!


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