The Finance Act, 2016 proposes to provide for an equalization levy of 6% of the amount of consideration for any specific service, received or receivable by a person, being non-resident, not having permanent establishment in India, from
– A person resident in India and carrying on business or profession or
– A non-resident having a permanent Establishment in India
However, such levy shall not be made
– If the service provider has a permanent establishment in India and these services are effectively connected with the permanent establishment
– If the aggregate amount of consideration from such specified services does not exceeds Rs. 1 lakh.
– If the payment is not for the purpose of carrying out business or profession
The provisions of Equalisation Levy shall not apply to the state of Jammu & Kashmir.
Specified Service means:
– online advertisement,
– any provision for digital advertising space or
– any other facility or service for the purpose of online advertisement and
– includes any other service as may be notified by the Central Government in this behalf
-income arising from providing specified services on which equalisation levy is chargeable is exempt from income tax
– Failure to deduct and deposit the equalisation levy shall lead to disallowance of expenditure (similar to Section 40(a)(ia))
– Where the equalisation levy is paid after the due date of filing returns, corresponding expenditure shall be allowed as deduction only for the previous year in which it was paid.
The provision seems to be a back door mechanism to tax online ads and other possible expenses paid/payable overseas on which TDS cannot be deducted owing to both domestic and DTAA restrictions. Possible expenses like ISP services, server charges and many more could well find their way under this clause in future. This seems to be a concerted effort to prevent base erosion.