Equalisation levy

Equalisation Levy: A Practical Compliance Guide for FY 2026-27

If your company buys advertising from Google, Meta, LinkedIn, or any non-resident digital platform and the annual bill exceeds ₹1 lakh, you are liable to deduct a 6% Equalisation Levy, deposit it by the 7th of the following month using Challan ITNS-285, and file Form 1 electronically by 30 June each year. Miss any step and you face a penalty equal to the entire levy amount, interest at 1% per month, and — the real sting — disallowance of your entire advertising expense under Section 40(a)(ib) of the Income-tax Act, 1961. This guide covers what the levy captures in 2026, how to comply each month and year, and what to negotiate in your vendor contracts.

What Is Equalisation Levy — and Why It Still Matters

The Equalisation Levy (EL) was Parliament's response to a structural problem: global digital platforms earning substantial revenue from Indian users and payers while holding no taxable presence — no permanent establishment (PE) — in India. Income-tax treaties largely shielded these payments from Indian withholding tax. The Finance Act, 2016 introduced EL as a levy outside the Income-tax Act framework, specifically to sidestep that treaty protection.

In FY 2026-27, EL is not a historical footnote. The 6% levy on online advertising remains in active force. If your finance team is netting off taxes from Google or Meta invoices without separately tracking EL deposits and filing Form 1, you almost certainly have a compliance gap that will surface at assessment. The levy is low-profile precisely because many companies assume their agencies or platforms handle it — they usually do not, at least not on your behalf.

Two Streams, One Framework

The Equalisation Levy has two distinct tracks with very different statuses in 2026.

EL 1.0 — Section 165, Finance Act 2016 (Active in FY 2026-27)

This is the original and still-operative stream. It imposes a 6% levy on consideration paid by an Indian resident — or a non-resident with a PE in India — to a non-resident for specified services, principally online advertising and digital advertising-related services. The trigger is the aggregate consideration to the same non-resident exceeding ₹1 lakh in a financial year.

The liability sits with the payer. You deduct EL from the gross payment, deposit it to the central government, and the vendor receives the net amount. The non-resident's income from these services is simultaneously exempt from income-tax under Section 10(50) of the Income-tax Act — a deliberate design to prevent both taxes stacking on the same payment.

EL 2.0 — Section 165A, Finance Act 2020 (Withdrawn from 1 August 2024)

The Finance (No. 2) Act, 2024 — implementing the Union Budget 2024-25 commitments — withdrew EL 2.0 for transactions on or after 1 August 2024. This 2% levy on non-resident e-commerce operators was a much wider net: it captured supply of goods, services, and digital content to Indian residents, non-residents using Indian IP addresses, and advertising targeting Indian customers. India agreed to withdraw it as part of its OECD/G20 Inclusive Framework obligations and to resolve bilateral trade-dispute pressure.

For FY 2024-25, EL 2.0 applies only for transactions from 1 April 2024 to 31 July 2024. For FY 2025-26 and FY 2026-27 it does not apply to new transactions — but the assessment window for earlier periods remains legally open. This matters more than most practitioners currently acknowledge, and it is covered separately below.

What Exactly Triggers EL 1.0: Scope, Threshold, and Edge Cases

Specified services under Section 165 of the Finance Act, 2016 include:

• Online advertisement
• Any provision of digital advertising space or any other facility or service for the purpose of online advertisement

In practice this covers Google Search Ads, Google Display Network, YouTube pre-roll ads, Meta Ads (Facebook and Instagram placements), LinkedIn Campaign Manager, Twitter/X Ads, Snapchat Ads, and programmatic placements through non-resident demand-side platforms (DSPs). It does not, by itself, cover SaaS subscriptions, cloud hosting, or pure content distribution — though those may carry other withholding obligations under Section 195.

For every non-resident digital vendor, your compliance team must answer three questions:

1. Is the vendor a non-resident? Most global ad platforms invoice from Irish, Singaporean, or US entities. Confirm by checking the invoice header and any service agreement entity details. A vendor with an Indian subsidiary may still invoice from abroad — the invoicing entity's residency controls EL applicability.
2. Is the service an online advertising or digital advertising-related service? Review the contract scope. Broad platform agreements sometimes bundle ad delivery with analytics software licences; the advertising component is subject to EL even if the total package spans both.
3. Does aggregate consideration in the FY exceed ₹1 lakh for this vendor? Track payments cumulatively from 1 April. The threshold applies per non-resident, per financial year — not per invoice.

Edge case — aggregation across group entities: Google LLC and Google Ireland are different legal entities but may provide the same advertising service. Where group companies invoice for the same service category, the conservative and practically defensible position is to aggregate and apply EL. Document the rationale contemporaneously.

Edge case — routing through an Indian agency: If you pay an Indian advertising agency (a resident) who then remits to Google, your payment to the agency is not subject to EL in your hands — there is no non-resident payee at your level. However, the agency's onward remittance to Google IS subject to EL in the agency's hands. Always confirm whether your agency is deducting and depositing EL on those remittances. Non-compliance at the agency level does not transfer liability to you directly, but it complicates the supply chain audit trail and may generate indirect scrutiny.

Step-by-Step Monthly and Annual Compliance

This sequence — followed without exception — keeps you clean.

Monthly cycle:

1. Pull a list of all invoices credited or paid to non-resident digital advertising vendors during the month. Credited means the liability entered your books, even if the wire transfer fires a week later — the earlier of credit or payment triggers EL.
2. Check the running FY aggregate for each vendor from 1 April. Once ₹1 lakh is crossed, all payments in that FY are subject to EL — including the month in which the threshold was crossed.
3. Compute EL at 6% of the gross consideration — the full invoice value before any offset.
4. Deduct 6% from the payment to the vendor, or absorb it as an additional outflow per your contract terms (see the vendor-contract section below).
5. Deposit using Challan ITNS-285 on the income-tax e-filing portal (incometax.gov.in) by the 7th of the month following the month of deduction. EL deducted in March 2027 must be deposited by 7 April 2027.
6. Log the transaction in a dedicated EL register: vendor name, invoice number, invoice date, gross consideration, EL amount, deposit date, BSR code, and challan serial number. This register is your first line of defence in any assessment.

Annual cycle:

• File the Equalisation Levy Statement in Form 1 on the income-tax e-filing portal by 30 June following the financial year. Form 1 for FY 2026-27 is due by 30 June 2027.
• File using a valid Digital Signature Certificate (DSC). Physical signatures are not accepted.
• Form 1 requires quarterly breakdowns of EL deducted, amounts deposited, and payee-level details.
• Cross-check Form 1 totals against your Challan ITNS-285 records before submission. Any mismatch between challan totals and Form 1 declarations will generate a mismatch notice.

Worked Example: An ₹18 Lakh Ad Budget and the Cost of Getting It Wrong

Facts: A Bengaluru-based D2C brand, Retailco Pvt. Ltd., spends ₹18,00,000 in FY 2026-27 on Meta Ads, invoiced by Meta Platforms Ireland Ltd. (a non-resident). Payments run at approximately ₹1,50,000 per month. The finance team books the invoices but does not track EL. No EL is deducted, no challan is deposited, and Form 1 is not filed. The lapse is identified in assessment for AY 2027-28.

What should have happened: The ₹1 lakh threshold was crossed in the very first month (₹1,50,000 > ₹1 lakh), so EL applied from Month 1. Total EL = 6% × ₹18,00,000 = ₹1,08,000, deposited in twelve monthly instalments of ₹9,000 each.

Penalty arithmetic:

Retailco gained nothing by not deducting — the ₹1,08,000 it failed to deposit went to Meta in full. Its real cost of non-compliance is ₹7,02,020 on an ₹18 lakh advertising budget — effectively a 39% surcharge on the entire spend. That is the asymmetry built into the law.

The Section 40(a)(ib) Trap

Section 40(a)(ib) of the Income-tax Act, 1961 disallows any expenditure on which Equalisation Levy was deductible but was not deducted — or, having been deducted, was not paid to the government by the due date. This is the direct analogue of the TDS disallowance under Section 40(a)(ia) and is equally unforgiving.

The disallowance is reversed in the year the EL is actually paid, but by then interest and penalties have compounded and you have already suffered advance-tax cash outflow on the disallowed expense for the intervening period. There is no relief for honest mistake or administrative oversight. The practical instruction is unambiguous: run the monthly EL deposit discipline without exception, every month, from the first payment that crosses the ₹1 lakh threshold.

One further point: if you pay EL late but before the filing of your income-tax return for the relevant year, the disallowance may not apply for that year — but interest on the late EL deposit continues to accrue regardless. Do not conflate the two issues.

What to Put in Your Vendor Contracts

Every service agreement with a non-resident digital advertising platform or ad-tech vendor should address five points explicitly.

1. EL allocation — gross-up or net-of-EL. If the contract specifies a fee of ₹10,00,000, clarify whether that is the gross amount (from which you deduct 6%, so the vendor receives ₹9,40,000) or the net-to-vendor amount (meaning you must gross up to ₹10,63,830 to deliver ₹10,00,000 after deducting 6%). Most global platforms price on a gross basis and do not offer gross-up. Write this allocation explicitly so there is no dispute when your wire falls short of the invoice total.

2. Withholding mechanics. Specify: (a) that you will deduct 6% EL from each invoice once the annual threshold is crossed, (b) the government deposit timeline (7th of following month), and (c) your commitment to provide the vendor with the BSR code and challan details for its own reconciliation.

3. Section 10(50) acknowledgement. Include a clause stating that the non-resident's income from these advertising services is exempt from Indian income-tax under Section 10(50) of the Income-tax Act, 1961, and that no separate withholding under Section 195 is required on the same consideration. This prevents the vendor from later claiming a TDS certificate is owed or filing for a lower-withholding certificate under Section 197 on amounts already covered by EL.

4. Documentation obligations on the vendor. Require the vendor to provide: (a) its tax residency certificate, (b) written confirmation of no PE in India, and (c) entity and address details consistent across all invoices. EL applies to non-residents without an Indian PE. If a platform later establishes an Indian PE, income-tax withholding under Section 195 may apply instead of EL — the contract should include a notification obligation if PE status changes.

5. Indemnity for disallowance caused by vendor default. If incorrect vendor data — wrong invoicing entity, inconsistent address, failure to disclose an Indian PE — causes your EL position to be successfully challenged in assessment, the vendor should indemnify you for the incremental tax and penalty cost. This clause is especially relevant when dealing with non-standard ad networks, affiliate platforms, or white-label resellers of international ad inventory.

Common Mistakes That Get Companies Into Trouble

Tracking the threshold per invoice instead of cumulatively. EL applies once aggregate payments in the FY cross ₹1 lakh. Finance teams that scan each invoice individually miss smaller monthly billings that cumulatively breach the limit by the end of quarter one.

Treating EL and Section 195 TDS as the same obligation. They are distinct. EL under Section 165 covers specified advertising services and replaces income-tax on that income for the non-resident (via Section 10(50)). Do not deduct both EL and Section 195 TDS on the same payment, and do not use Challan ITNS-281 (TDS) for EL deposits — use ITNS-285.

Assuming the 30 June Form 1 deadline is soft. It is not. Late filing attracts ₹100 per day from the due date with no cap specified in the provision itself. For FY 2026-27, block 30 June 2027 in your compliance calendar by April, not June. A DSC renewal issue discovered on 28 June leaves no room to manoeuvre.

Ignoring prepaid ad credit purchases. Some platforms allow you to buy advertising credits or top up a wallet in advance. The purchase of those credits from a non-resident is consideration for a specified service, and EL applies at the time of purchase — not as the credits are consumed. This timing difference catches many treasury teams off guard.

Neglecting documentation for EL 2.0 legacy periods. Even though EL 2.0 is no longer applicable to new transactions, assessment notices for FY 2020-21 through FY 2024-25 (partial) can still arrive within the permissible limitation period. Quarterly challan deposits, Form 1 filings, and transaction records from those years must be retained and accessible.

EL 2.0 Legacy: The Assessment Window Is Still Open

The withdrawal of EL 2.0 from 1 August 2024 does not close the books on earlier periods. The period of limitation for assessment orders under the EL framework mirrors income-tax assessment timelines; for FY 2020-21 (the first year EL 2.0 applied), that window extends meaningfully beyond 2026.

For non-resident e-commerce operators — or their Indian advisers — the critical documents to preserve are:

• Quarterly ITNS-285 challan deposits covering each quarter EL 2.0 was applicable
• Form 1 annual filings for each FY from FY 2020-21 through FY 2024-25
• Transaction-level records establishing the quantum and nature of Indian-facing supply
• Any correspondence with or notices from the income-tax or EL administration

If your client is a non-resident e-commerce operator that had Indian-facing revenue between April 2020 and July 2024, reconstruct the filing history now, before a notice forces a rushed response. The cost of proactive review is a fraction of the cost of defending an assessment with incomplete records.

OECD Pillar One and the Future of EL 1.0

India withdrew EL 2.0 in direct fulfilment of commitments made under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), specifically the 2021 political commitment to withdraw unilateral digital-services measures once Pillar One Amount A is implemented through a Multilateral Convention. The US, which operated a Section 301 trade investigation against EL 2.0, had made withdrawal a precondition for continued trade dialogue.

EL 1.0 is a different matter. It predates the 2021 commitment and has not been included on the withdrawal list as notified under the Inclusive Framework framework agreement. As of mid-2026, the Multilateral Convention for Amount A is in development but ratification timelines across all signatory jurisdictions remain uncertain.

The practical implication for FY 2026-27 planning is straightforward: EL 1.0 on online advertising is a permanent line item, not a transitional cost. Build 6% of gross digital ad spend into your budget wherever the vendor is a non-resident. Do not rely on OECD negotiations to resolve this in the near term. Any future credit mechanism — offsetting EL 1.0 amounts against Amount A allocations — will be governed by the treaty text when it is actually ratified, and will be prospective in application.

Key Takeaways

• EL 1.0 at 6% is active in FY 2026-27 on online advertising payments to non-residents exceeding ₹1 lakh aggregate per FY. No treaty protection, no startup exemption, no de minimis below the threshold.
• Monthly compliance is non-negotiable: deduct at credit or payment (whichever is earlier), deposit via Challan ITNS-285 by the 7th of the following month — every month without exception.
• Form 1 for FY 2026-27 is due 30 June 2027, filed electronically with DSC. A 200-day late filing costs ₹20,000 in direct penalty — but the disallowance exposure dwarfs that figure.
• Section 40(a)(ib) is the real teeth: failure to deduct or deposit EL disallows the entire advertising expenditure in your income-tax assessment, converting a 6% levy into an effective 25%+ tax hit on the full spend.
• EL 2.0 is withdrawn for transactions from 1 August 2024 onwards, but the assessment window for FY 2020-21 through FY 2024-25 (partial) remains open — preserve all documentation through at least FY 2030-31.
• Update vendor contracts now: allocate who bears EL (gross-up or net-of-EL), require tax residency certificates and PE confirmation, include a Section 10(50) acknowledgement, and insert an indemnity clause for disallowances caused by incorrect vendor data.
• OECD Pillar One will not rescue you from EL 1.0 in the foreseeable future: treat the 6% levy as a permanent cost of digital advertising with non-resident platforms and price it into your marketing budgets accordingly.