Equalization Tax on Online Advertisements : What Every Enterpreneur Must Know to Prevent Harsh Penalty ?

Are you small business owner or online enterprener or general business entity that usually place advertisement in Google Adwords or Facebook Ads or Twitter business ad or any other online advertisment platform ? If yes, then from this year , levy of one of its kind of tax called Equalization Tax is going to haunt you more than Google , Facebook or Twitter . This post is dedicated to clear the air around this new tax regime on online adversiements by Indian residents to non-resident online giant companies like Google , Facebook and Twitter. Format for thsi article is FAQ , so that all your common questions are answered !

one_thumb.gifUnder which provision of Income Tax Act , is the Equalization Tax imposed ?

This tax is not imposed under Income Tax Act , but the legal provisions for chargingt it is in Chapter VII of the Finance Act 2016 which starts from section 163 to section 180 . However, certain provision for regualting it are provided in the Income Tax Act . For example , appeal or enquiry etc are based on Income Tax Act.

two_thumb.gifWho is required to pay equalization tax ?

If you are resident Indian or Permanent Establsihment (PE) of a non-resident and pay to a non-resident for online advertisement and digital advertising space , you may have to pay tax if the total payment in aggregate is more than Rs one lakh ( 100 thousands ).

three_thumb.gifWhat is the tax rate for paying equalization tax ?

The tax is 6 % on the gross payments

fourWho are exempted from levy of equalization tax (EL)  ?

Three circumstances in which the EL will not be appliable are as under :

  1. The amount of payment for online advertising or digital advertising space is below Rs 1 Lakh in a year.
  2. The receiver of the payment has a permanent establsihment in India and such PE is taxable for such receipts.
  3. The payment for online advertisement or digital advertising space is not forthe purpose of carrying  business or profession .

fiveWhether the payment of Equalization Tax deductible as business expense ?

Yes, it is deductible . But section 40(a)(ib) has been introduced to provide that if the equalization tax is not deducted or paid by the due date of filing of tax return, the expense will be disallowed . Here is the excerpt of the said amendment

(ib) any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 :

Provided that where in respect of any such consideration, the equalisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid

sixWhat if I pay to many non-residents below Rs 1 Lakh ?

As per the law , in my considered opinion, no equalization tax is payable if the amount is below Rs 1  lakh. For example , you can place advertisement of Rs 90,000 each to Google , Facebook and Twitter , totalling Rs 2,70,000 . Yet no liability of equalization of tax .

sevenWhat is the time limit for payment of EL ? Do I need to file any statment ?

Four things are to be noted

  1. Section 166 of Finance Act 2016 provides that tax is to be deducted at source and deposited by the seventh day of the month immediately following the month in which payment was made or credited.
  2. You will have to pay interest @ 1% for late payment of EL
  3. A statement in prescribed Form 1 has to be filed electronically  before 30th June immediatley following the relevant previous years  . ( Rule 5 & 6 Equalization Rule 2016 )
  4. You can revise teh statement within two years from the end of financial year in which the amount was paid or payable.

eight.gifIs there penalty for not complying with provision of Chapter VIII of the Finance Act 2016?

Yes, there are provision for imposing penalty under section 171 and sec. 172  of the F.A 2016  . So penalty proceeding can be started if

  1. You did not deduct the equalization levy
  2. You deduct , but do not deposit the EL
  3. You do not file the statement in Form 1

nine.gifIs any other law under Income Tax Act apply to income on which Equalization Levy is deducted by resident?

Section 10(50 ) of the income Tax Act provides exemption to any income on which equalization levy is deducted . So , non-resident company will not be laible of any consequances as far as amount on which equalization tax was decuted . Section 10(50) is given below :

ten-19How to compute tax if non resident refuses to pay ?


Whether the non-resident refuses or desire to pay, as per the llaw under section 166(3) tax is to be deducted to deposit the levy  @ 6% of the amount paid or payable .

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