Equalisation Levy

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Equalisation Levy: Your Complete FY 2026-27 Compliance Guide

The 6% Equalisation Levy on specified online advertising services remains fully operative in FY 2026-27. The 2% levy on e-commerce supply or services by non-resident operators was withdrawn from 1 August 2024 by the Finance (No. 2) Act, 2024. If your company pays a non-resident for digital advertising and the annual aggregate to that vendor exceeds ₹1 lakh, you must deduct 6%, deposit via ITNS 285 by the 7th of each following month, and file the annual statement in Form 1 by 30 June 2027.

What Equalisation Levy Is — and What It Is Not

Equalisation Levy is a standalone charge enacted under Chapter VIII of the Finance Act, 2016. It is not income tax. It is not TDS under the Income-tax Act, 1961. It is not GST. It is a sui generis levy — the payer deducts and deposits it, but the entire obligation sits under a separate statutory framework.

That distinction carries three hard practical consequences:

• You cannot invoke a DTAA to avoid paying it. Double Taxation Avoidance Agreements govern income tax. Equalisation Levy is categorically outside their scope.
• The non-resident service provider is not required to file an Indian income-tax return for income subject to this levy, because that income is exempt from income tax under Section 10(50) of the Income-tax Act, 1961.
• Your company — as the Indian payer — carries the entire deduction and deposit obligation. If you default, the penalty, interest, and notice fall on you, not on Google, Meta, or any other non-resident platform.

India modelled the levy on similar unilateral digital services taxes in France and the UK, but structured it as a withholding mechanism to make collection practical without requiring non-residents to establish a tax presence in India. That architecture is unchanged today.

The Current Legal Structure in FY 2026-27

The 6% Advertising Levy — Fully Operative

Under Section 165 of the Finance Act, 2016, a 6% Equalisation Levy applies on the gross consideration received or receivable by a non-resident from:

• A resident person in India, or
• A non-resident having a Permanent Establishment (PE) in India

…for specified services, which are defined as:

1. Online advertisement
2. Provision of digital advertising space or any other facility or service for the purpose of online advertising

Threshold: The levy applies only where the aggregate consideration paid to a single non-resident for specified services exceeds ₹1 lakh in a financial year. Below that threshold, no levy arises.

In practice, "specified services" captures: Google Ads (Search, Display, YouTube), Meta Ads, LinkedIn Ads, X/Twitter Ads, programmatic ad network spend through non-resident platforms, and sponsored placements on non-resident digital publishers. If your company uses any of these, assume the ₹1 lakh threshold is crossed within the first few months of the year and plan accordingly.

The 2% E-Commerce Levy — Withdrawn from 1 August 2024

Section 165A of the Finance Act, 2016 — which imposed a 2% levy on consideration received by non-resident e-commerce operators for e-commerce supply or services — was omitted by the Finance (No. 2) Act, 2024 with effect from 1 August 2024.

For FY 2026-27, there is zero Equalisation Levy on e-commerce transactions. The entire year falls after the withdrawal date. If your accounting system still carries a "2% EL" line item, remove it. Any undischarged liability from 1 April 2024 to 31 July 2024 (part of FY 2024-25) should already have been settled; if not, address it immediately.

Who Must Deduct, When, and How

The Obligated Payer

The deduction obligation falls on:

• Every resident person making a payment to a non-resident for specified services, and
• Every non-resident with a PE in India making such a payment.

There is no size filter on the payer. A founder spending ₹1.2 lakh a year on Google Ads is equally obligated as a large-cap listed company spending ₹30 crore.

Trigger Point: Earlier of Payment or Credit

Deduct the levy at the earlier of:

• The date of actual payment to the non-resident, or
• The date of credit to the account of the service provider in your books.

This mirrors the TDS timing rule but operates independently of the Income-tax Act. If you raise a provision (credit the platform's payable account) before remittance, the deduction clock starts at that credit date.

Deposit Deadline and Challan

Deposit the deducted levy to the Central Government by the 7th of the month immediately following the month of deduction.

Challan: Use ITNS 285 on the Income Tax e-filing portal (incometax.gov.in). Select Assessment Year 2027-28 for FY 2026-27 payments. Retain the Challan Identification Number (CIN) — it feeds into your Form 1 filing.

Monthly Compliance: A Step-by-Step Sequence

Run this sequence every month as part of your accounting close:

1. Pull all vendor invoices received or posted during the month from non-resident digital advertising platforms.
2. Compute the running annual aggregate paid to each distinct non-resident vendor since 1 April 2026. Has the total crossed ₹1 lakh? If yes, the levy applies on all further amounts. The levy does not apply retrospectively to the amounts below the ₹1 lakh threshold.
3. Calculate 6% on the gross consideration for the current month's invoice. Use the gross advertising spend — exclude only amounts that are clearly a separately invoiced Indian GST/IGST charge.
4. Net the payment — remit the gross invoice amount minus the 6% withheld, or pay the full gross and separately transfer the levy to the government, depending on your commercial arrangement with the platform.
5. Deposit via ITNS 285 on or before the 7th.
6. Record the CIN in your Equalisation Levy register alongside the vendor name, invoice number, gross amount, and levy amount.
7. Tag the corresponding Form 15CA/15CB filing with the EL deduction. Outward foreign remittances above applicable thresholds require Form 15CA; the EL deduction should be stated in the remarks. A mismatch between Form 1 and 15CA data is a standard audit trigger.

Annual Statement: Form 1

Every payer must file an annual statement in Form 1 on the income tax e-filing portal after the financial year ends.

Due date for FY 2026-27: 30 June 2027.

The form requires disclosure of:

• Name, address, and country of each non-resident service provider
• Nature of the specified service
• Gross consideration paid during the year
• Equalisation Levy deducted
• Challan details and dates of each deposit

No physical submission is required. The form is filed online. No extensions are ordinarily notified, so 30 June is a hard deadline. Even if your total EL liability for the year is ₹6,000, Form 1 is mandatory.

Worked Example: An Indian D2C Brand in FY 2026-27

Suppose Rangvilla Pvt. Ltd., a Delhi-based direct-to-consumer lifestyle brand, runs digital advertising across three non-resident platforms:

Monthly drill-down for Google Ads: Rangvilla pays ₹1,50,000 per month. Each month it deducts ₹9,000 (6% × ₹1,50,000) and deposits by the 7th. Over 12 months: ₹1,08,000 deposited. The small ad network at ₹80,000 for the full year falls below the ₹1 lakh threshold — no levy, no Form 1 entry for that vendor.

Consequence of missing April's deposit: If Rangvilla deposits the April ₹9,000 on 20 May instead of 7 May:

• Interest: 1% × ₹9,000 × 1 month (part of May counts as one full month) = ₹90
• Penalty for non-deposit: ₹9,000 (equal to the unpaid levy under Section 171)
• Total extra cost: ₹9,090 on a ₹9,000 liability — effectively doubling it. This is not a rounding problem; it is a structural disincentive built into the legislation.

Form 1 delay: If Rangvilla files Form 1 on 10 August 2027 instead of 30 June 2027 — a delay of 41 days — the penalty under Section 172 is ₹100 × 41 = ₹4,100.

What the 2% Withdrawal Actually Means in Practice

The removal of the 2% e-commerce levy looks like a clean simplification. It is not — it transfers compliance uncertainty from Equalisation Levy to income tax and TDS.

Section 10(50) No Longer Shields E-Commerce Income

Section 10(50) exempts from income tax any income "chargeable to Equalisation Levy." Once the 2% levy ceased, this exemption no longer covers e-commerce income earned by non-residents from Indian buyers. Non-resident marketplace operators, SaaS platforms, and subscription services could, in principle, be taxable in India under:

• Significant Economic Presence (SEP) under Explanation 2A to Section 9(1)(i): SEP is established if a non-resident's revenue from India exceeds ₹2 crore in a financial year or it systematically interacts with 3 lakh or more users in India (as prescribed under Rule 11UD).
• Business connection rules and the profit attribution mechanism under Rules 10OA to 10OG.

What Indian Payers Must Do Now

If your company pays a non-resident e-commerce platform, SaaS provider, or subscription service:

1. Re-examine Section 195 TDS applicability. Ask: is this payment "income" arising in India for the non-resident? If the platform earns from Indian buyers and has SEP, a Section 195 TDS obligation may exist.
2. Verify DTAA coverage. Most US and EU-based platforms will assert that their income is business profits taxable only in their residence country absent an Indian PE. Obtain a valid Tax Residency Certificate (TRC) and Form 10F from the vendor to apply lower DTAA rates.
3. Document your position in writing — whether you deduct TDS or conclude no deduction is warranted. A defensible documented analysis materially reduces the penalty risk under Section 271C (failure to deduct).
4. Seek a lower or nil deduction certificate under Section 195(3) or 197 if the payments are material and the taxability analysis is genuinely uncertain.

Penalties and Interest: The Full Cost of Getting It Wrong

The 100% penalty under Section 171 is the number your CFO needs to see. Unlike TDS defaults — where the penalty under Section 271C is assessed with some adjudicatory discretion — the Equalisation Levy penalty is mechanical. Miss a deposit, the penalty equals the deposit. Budget and treasury teams should schedule EL deposits with the same priority as advance tax instalments.

Common Mistakes and Pitfalls to Avoid

1. Treating the ₹1 lakh threshold as a per-invoice test. The threshold is an annual cumulative aggregate per non-resident vendor. Once it is crossed, the levy applies to the amount exceeding the threshold on that crossing invoice — not retroactively to all prior payments in the year.

2. Confusing OIDAR GST with Equalisation Levy. IGST on Online Information and Database Access or Retrieval (OIDAR) services is a separate tax paid either by the non-resident or reverse-charged to you. These two taxes arise on the same vendor invoice but are entirely different in legal basis, rate, and payment channel. Do not net one against the other.

3. Assuming the non-resident platform will self-remit. The non-resident has no obligation under this framework. Google, Meta, and LinkedIn invoice the full gross amount. The deduction and deposit are yours to execute.

4. Skipping Form 1 for small EL amounts. Form 1 is mandatory regardless of quantum. A ₹4,200 annual liability still needs a Form 1 by 30 June. The ₹100-per-day penalty applies from day one of delay.

5. Failing to reconcile EL with Form 15CA. Every foreign remittance above applicable thresholds requires a Form 15CA filing. Your EL deduction must be referenced in the 15CA remarks. Discrepancies between Form 1 data and 15CA filings are a standard selection criterion in EL scrutiny assessments run through INSIGHT, the income tax risk engine.

6. Still deducting 2% EL on e-commerce invoices in FY 2026-27. The withdrawal was from 1 August 2024. Any 2% deductions made after that date are incorrect and require correction. Excess deposits can be claimed as refund; the vendor must not be shorted on payments that carry no levy.

7. Ignoring SEP analysis post-withdrawal. The comfortable presumption that e-commerce payments to non-residents required neither EL nor TDS has been disrupted. FY 2026-27 is the first full year in which your e-commerce vendor payments sit in a genuine grey zone between SEP taxability and DTAA protection.

OECD Pillar One: What to Watch for FY 2027-28 and Beyond

India withdrew the 2% e-commerce levy as a signal of commitment to the OECD/G20 Inclusive Framework's Pillar One — Amount A solution, which proposes to reallocate 25% of residual profits of the largest multinationals (revenue above €20 billion, profit margin above 10%) to market jurisdictions such as India.

As of FY 2026-27, Pillar One has not entered into force. The Multilateral Convention needed to operationalise Amount A requires ratification by a sufficient critical mass of jurisdictions. Until that threshold is met, India's digital tax toolkit in AY 2027-28 remains:

• 6% Equalisation Levy on online advertising (Chapter VIII, Finance Act 2016)
• SEP rules under Section 9 with profit attribution under Rules 10OA–10OG
• Standard PE-based DTAA framework

Three signals to monitor:

1. Pillar One Multilateral Convention ratification progress. If ratified, India will repeal the 6% levy, replacing it with Amount A revenue allocated through an agreed formula. Indian payers would no longer withhold EL; non-resident MNEs would pay tax directly.
2. SEP operationalisation. SEP exists in domestic law but practical levy of tax on SEP income remains disputed. A clear notification or CBDT circular on compliance mechanism for SEP income would crystallise new Section 195 obligations.
3. India-US bilateral dynamics. The USTR has historically placed India's EL on its Section 301 watchlist. Any bilateral digital tax arrangement between India and the US could accelerate changes to the 6% levy independent of Pillar One multilateral timelines.

For FY 2026-27, your compliance position is unambiguous. Keep monitoring the OECD calendar; your FY 2027-28 obligations could look materially different.

Key Takeaways

• The 6% Equalisation Levy on specified online advertising services is fully operative in FY 2026-27. Any resident payer — or non-resident with an Indian PE — paying a non-resident for online advertising above ₹1 lakh per vendor per year must deduct and deposit this levy.
• The 2% e-commerce Equalisation Levy was withdrawn from 1 August 2024 by the Finance (No. 2) Act, 2024. It has no application whatsoever in FY 2026-27.
• Deposit by the 7th of every following month using ITNS 285 on the income tax e-filing portal, quoting AY 2027-28. A missed deposit triggers a 100% penalty on the unpaid levy plus 1% per month interest — the penalty alone can equal the tax.
• File Form 1 by 30 June 2027 on the income tax e-filing portal. The ₹100-per-day late filing penalty applies from day one, with no materiality exemption for small EL amounts.
• Section 10(50) no longer shields non-resident e-commerce income now that the 2% levy is gone. Re-examine Section 195 TDS obligations and DTAA positions on all payments to non-resident marketplace, SaaS, and subscription platforms for FY 2026-27.
• The ₹1 lakh threshold is a cumulative annual aggregate per vendor, not a per-invoice test. Plan your vendor-wise tracking from 1 April to avoid surprises mid-year when the threshold is crossed.
• Pillar One is not yet operative. Treat the 6% advertising levy as a permanent compliance fixture for now, build it into your FY 2026-27 monthly close checklist, and review your position annually as multilateral negotiations evolve.