July 20, 2020
India Passes 2% Equalization Levy and 6% Advertising Levy on Non-India-Based Sellers
Posted by Marcus Sharei
The Indian tax authorities have passed the newly introduced equalization levy (EL) of 2% on non-resident e-commerce sellers (the “E-com EL”) who do not have any permanent establishment in India, and a 6% tax applicable to B2B Indian advertising revenue (the “Ad EL”). This legislation was introduced by the Finance Act 2020 and was effective April 1, 2020. It requires every non-resident person or entity selling goods or services in India through online means to pay 2% on their gross receipts collected from customers in India, as well as 6% of their Indian advertising revenues. This “sales tax” is a direct tax on the non-India-based seller. So, the seller must either pass on the 2% or 6% tax to the buyer or absorb it as part of operating costs. Since this is a “sales tax,” no foreign tax credit is applicable.
Who Does This Apply To?
The levy applies to gross receipts from e-commerce supply of goods or services to:
- Any business or individual resident in India.
- Any business or individual buying such goods or services using an internet protocol (IP) address located in India.
- A non-resident in “specified circumstances.” The specified circumstances have been interpreted locally to mean sales of advertisement targeting a customer in India or a customer accessing the advertisement through an IP address located in India. This also includes sale of data collected from a person resident in India or from a person who uses an IP address located in India.
Who Is Required to File?
All U.S. sellers (and non-U.S. sellers) selling goods or services via the internet (online sales) to Indian customers, above a $267,000 threshold (total annual sales to India in the prior calendar year), unless the seller already has a taxable branch in India (permanent establishment), meaning the seller’s gross receipts from Indian sources is already subject to income tax in India.
When Is the Tax Due?
The requirement is effective April 1, 2020. Taxes must be paid each quarter and the first due date was July 7, 2020. To comply with these provisions, a U.S. taxpayer must register with the Income Tax Department in India, obtain a Permanent Account Number (PAN) and pay the tax one week after each quarterly end date. They must also file an annual return as applicable to the EL.
What Happens if You Do Not File?
Failure to file and pay the EL results in a penalty equal to 100% of the tax the seller failed to pay each quarter, and 12% annual interest on the unpaid balance. This can result in an effective tax rate of 4% or 12% of quarterly gross receipts, plus 12% interest. In addition, there may be prosecution in certain circumstances.
What to Do Now
Begin to analyze your gross revenues from India-sourced customers, determine your quarterly tax exposure and decide if you choose to comply with the law. The World Trade Organization has challenged this legislation, but it may be some time before the law is ultimately upheld or struck down. If upheld, the tax penalties for non-filing and non-payment of tax can be significant (4% or 12% tax on the applicable gross receipts).
Marcus specializes in international tax structuring, cross-border transactions, transfer pricing, merger & acquisition integration, and global earnings mobility strategies. He has extensive experience in the manufacturing, internet, software, computer hardware, biotech, and services industries.
Marcus is a Certified Public Accountant and earned his Bachelor of Arts at University of California, Berkeley, and Master’s in Taxation and MBA degrees at Golden Gate University. He is also a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants.