TDS & Equilisation Levy on Ads

TDS & Equalisation Levy on Ads: The Complete 2026 Compliance Guide for Indian Businesses

When you pay Google, Meta or LinkedIn for digital advertising, three separate tax obligations run simultaneously on the same invoice: a 6% Equalisation Levy (EL) on the gross amount, IGST at 18% under Reverse Charge Mechanism (RCM), and — where applicable — TDS under Section 194C, 194J or 195 of the Income-tax Act, 1961. Miss any one of them and the entire advertising expense can be disallowed under Section 40(a)(ib) or 40(a)(i). This guide tells you exactly what applies, in what order, and by which date, for FY 2026-27 (AY 2027-28).

How the Tax Framework Sits in 2026

The digital advertising tax landscape changed materially in 2024. The most important shift was the withdrawal of the 2% Equalisation Levy on e-commerce supply and services (introduced by Finance Act 2020) effective 1 August 2024. That levy — which had unsettled foreign e-commerce operators for four years — is now gone for supplies made on or after that date.

What remains fully operative is the original 6% Equalisation Levy on online advertising services, enacted under Chapter VIII of the Finance Act, 2016. Budget 2025 made no changes to this stream. It applies to every Indian business paying a non-resident advertising platform that has no Permanent Establishment (PE) in India.

For FY 2026-27, your digital advertising spend involves exactly three parallel obligations:

1. Equalisation Levy at 6% — on payments to non-resident ad platforms with no PE in India
2. IGST at 18% under RCM — on the same invoice, treated as an import of service under the IGST Act, 2017
3. TDS under Section 194C or 194J — for Indian platforms, Indian agencies, and any non-resident with a PE in India

These three regimes are legally independent. Satisfying one does not discharge another.

The 6% Equalisation Levy: Who It Applies To and When

The EL at 6% applies to the gross consideration paid or payable to a non-resident for:

• Online advertising services
• Provision of digital advertising space or facility
• Any related service that supports digital advertising

Who must deduct and deposit the levy:

• Any Indian resident carrying on business or profession
• Any non-resident with a PE in India making such payments
• Only if aggregate payments to a single non-resident vendor exceed Rs. 1,00,000 in a financial year

Most meaningful advertisers cross this threshold within the first one or two months of a campaign. Below Rs. 1,00,000 annually to any single foreign platform, no EL is payable — but track cumulative spend carefully to catch the crossover month.

Rate: 6% flat on the face value of the invoice. There is no grossing up. If the invoice is Rs. 5,00,000, the EL is Rs. 30,000.

The Billing Entity Is Everything

Before applying EL to any invoice, confirm who is actually billing you. The tax treatment hinges entirely on this.

Check the "Bill From" or "Supplier" name on every invoice. Billing entities change when campaigns are restructured or accounts migrate between regions. Many companies discover mid-year that they have been applying the wrong treatment for months.

PE Status and Tax Residency Certificate

If the vendor's PE status is in any doubt, obtain a Tax Residency Certificate (TRC) from them for the current FY and a written declaration confirming no PE in India. Without this documentation, a scrutiny officer can argue that TDS under Section 195 should also have been deducted — creating overlapping demands. With a valid TRC and PE declaration on file, your position is defensible.

TDS on Advertising: Section 194C, 194J, and Section 195 — When Each Applies

Section 194C — Domestic Advertising Contractors

Section 194C applies to payments made to Indian contractors and sub-contractors for work, and Explanation (iv)(e) to that section explicitly includes advertising in the definition of work. It applies when:

• You pay an Indian advertising agency, media house, or platform for placing, creating, or managing ads
• The payment exceeds Rs. 30,000 per single transaction, or Rs. 1,00,000 cumulatively to one contractor per FY

Rates:

• Individual or HUF: 1%
• Company or any other entity: 2%

Example: You engage an Indian performance marketing agency at Rs. 5,00,000 per month. They manage your Google Ads campaigns end-to-end and separately pay Google. Your TDS obligation: 2% × Rs. 5,00,000 = Rs. 10,000 per month, to be deposited by the 7th of the following month. You do not apply EL here — EL is the agency's obligation when they remit funds to Google Ireland.

Section 194J — Professional or Technical Services

If the agency relationship is advisory in nature — brand strategy, creative direction, media planning — the payment may cross into fees for professional or technical services under Section 194J, attracting 10%. A pure execution contract (buying ad inventory, managing bids) generally stays under Section 194C. When a single invoice bundles both advisory and execution, applying 194J to the full amount is the conservative and safer position.

Section 195 — Payments to Non-Residents: When Does It Apply?

Section 195 requires TDS on payments to non-residents that are chargeable to income tax in India. Since income on which EL is charged is expressly exempt under Section 10(50) of the Income-tax Act, 1961, your payment to Google Ireland or Meta Ireland is not chargeable to Indian income tax — and therefore Section 195 TDS does not arise alongside EL.

The one scenario where Section 195 can coexist with advertising payments is when the non-resident has a PE in India. In that case, EL does not apply (EL is only for non-PE non-residents), and Section 195 TDS applies to the full payment at applicable rates as per the relevant Double Taxation Avoidance Agreement (DTAA) or Finance Act rates, whichever are lower.

The Section 40(a)(i) and 40(a)(ib) Disallowance: What It Actually Costs You

This is the part most advertisers underestimate — sometimes fatally for their P&L.

Section 40(a)(ib): The advertising expense is disallowed in full if:

• The EL was deductible but not deducted, OR
• The EL was deducted but not deposited on or before the due date for filing the return under Section 139(1)

The disallowance is on the entire advertising expense — not merely the EL amount. If you pay back taxes and the levy after the return due date, the expense is allowed in the year of actual payment, creating a permanent timing mismatch in your financial statements.

Section 40(a)(i): An identical mechanism applies where TDS under Section 195 is required but not deducted or not deposited.

Worked Cost Example: The Full Penalty Stack

Entity: Prism Retail Pvt Ltd (corporate tax at 25% under Section 115BAA) FY 2026-27 non-resident advertising spend: Rs. 60,00,000 across Google, Meta, and LinkedIn Failure: EL not deducted or deposited for the full year

On Rs. 60 lakh of advertising, non-compliance can wipe out over Rs. 22 lakh in penalties, interest, and additional tax — more than 37% of the ad budget.

GST Under Reverse Charge: The Compliance That Runs Alongside EL

Online advertising services from a non-resident are an import of services under Section 2(11) of the IGST Act, 2017. The recipient — you — must self-assess and pay IGST at 18% under RCM as per Notification No. 10/2017-IGST (Rate).

Key mechanics:

• IGST liability arises on the earlier of: date of payment to the vendor, or the date immediately following 60 days from the date of invoice
• Report and pay via GSTR-3B (Table 3.1(d) — Outward taxable supplies attracting reverse charge) by the 20th of the following month
• Simultaneously claim Input Tax Credit (ITC) in Table 4(A)(2) of the same GSTR-3B, provided:
• The services are used for making taxable outward supplies
• The invoice and payment proof are retained
• Conditions under Section 16 of the CGST Act, 2017 are satisfied

For most registered businesses using ads for taxable supply, the RCM ITC results in a net zero cash outflow on GST — you pay and reclaim in the same return. But the procedural filing is mandatory regardless of the net cash impact. Missing the RCM entry in GSTR-3B attracts interest at 18% per annum under Section 50 of the CGST Act, 2017.

Practical distinction: If your Google Ads account is billed by Google India Pvt Ltd, CGST + SGST is charged directly on the invoice (forward charge) — no RCM obligation arises. If billed by Google Ireland Ltd or Google Asia Pacific, IGST under RCM is your obligation. Never assume based on the platform name alone; verify the billing entity on every invoice.

How to Deposit the Equalisation Levy and File Form 1: Step-by-Step

Monthly Deposit — by the 7th of the Following Month

1. Log in to the Income Tax e-Filing Portal (incometax.gov.in)
2. Go to e-Pay Tax → New Payment → Select the relevant Assessment Year
3. Select Major Head: 0005 — Other Taxes and Duties on Commodities and Services; Minor Head: 800 — Equalisation Levy
4. Enter the gross consideration (not the levy amount); the portal computes 6% automatically
5. Pay via net banking or RTGS/NEFT; download the Challan Internet Number (CIN) immediately
6. Record the CIN against the vendor in your EL register

> Critical March deadline: Under the proviso to Section 8(1) of the Finance Act, 2016, EL on payments made in March is due by 31 March itself — not 7 April. This is the single most frequently missed deadline in EL compliance. Flag it in your compliance calendar now.

Annual Return — Form 1 (by 30 June)

Form 1 is the Statement of Equalisation Levy filed annually with the Assessing Officer for each financial year. For FY 2026-27, Form 1 is due by 30 June 2027.

1. Log in to the Income Tax Portal → Compliance → Equalisation Levy → Form 1
2. Provide vendor-wise details: name, country of residence, nature of service, gross consideration, levy computed, levy deposited, and CIN references
3. Submit and download the acknowledgement (EL-1)

A missed or defective Form 1 attracts a penalty of Rs. 100 per day under Section 10(1A) of the Finance Act, 2016 for each day of default. File even if you have zero liability — a nil return is positive evidence of intentional compliance and shields against allegations of concealment during scrutiny.

Form 3CD (Tax Audit Disclosure)

If you are subject to tax audit under Section 44AB, Clause 44 of Form 3CD requires a payment-wise disclosure of all amounts paid to non-residents, the nature of service, and whether EL was deducted and deposited. Your tax auditor needs your full EL register — vendor-wise, month-wise — at least a fortnight before audit completion. Reconstructing this from the GL alone is unreliable and time-consuming.

Worked Example: Three Ad Platforms, One Month's Books

Entity: Prism Tech Solutions Pvt Ltd (GST-registered, software; output is taxable at 18%; corporate tax at 25%) Month: April 2026

Actions by 7 May 2026:

• Deposit EL of Rs. 48,000 via challan (Major Head 0005, Minor Head 800)
• Deposit TDS of Rs. 1,000 on MediaPulse India payment via challan (Major Head 0021, Minor Head 200)
• Net remittance to Google Ireland: Rs. 5,00,000 − Rs. 30,000 = Rs. 4,70,000 (EL deducted from consideration)
• Net remittance to MediaPulse India: Rs. 50,000 − Rs. 1,000 = Rs. 49,000

Actions by 20 May 2026 (GSTR-3B for April):

• Table 3.1(d): RCM IGST payable = Rs. 1,44,000
• Table 4(A)(2): ITC on RCM = Rs. 1,44,000 (eligible, since software services are taxable)
• Net GST cash outflow: Rs. 0

Year-end outcome: All three compliances discharged on time. Full Rs. 8,50,000 advertising expense is deductible in the P&L for FY 2026-27. If EL of Rs. 48,000 had been omitted, Rs. 8,00,000 (the non-resident portion) would be disallowed under Section 40(a)(ib) — an additional tax cost of Rs. 2,00,000 at 25%.

Common Mistakes and How to Fix Them Before They Bite

1. Treating EL as the foreign vendor's problem. The obligation is the payer's. Unlike GST where the supplier files, EL has no mechanism for the non-resident to discharge it. If you pay Google the full invoice without deducting EL, you are personally liable for the levy plus interest plus penalty. Fix: include EL computation in your vendor payment approval workflow.

2. Computing EL on net payment instead of gross invoice. The levy applies to gross consideration as invoiced. Do not net off any discounts, forex adjustments, or GST reimbursements before applying 6%.

3. Confusing the withdrawn 2% EL with the active 6%. The 2% e-commerce supply EL ended 1 August 2024. The 6% advertising-services EL was never withdrawn and applies fully to FY 2026-27. If your compliance memo still references both rates without the withdrawal note, update it.

4. Missing the 31 March accelerated EL deadline. March payments are the largest EL month for most advertisers (Q4 campaigns). The deposit is due 31 March, not 7 April. Build a specific calendar alert for this.

5. Booking EL paid as an advertising expense. EL is not your cost — you deduct it from the vendor's consideration and remit it to the government on their behalf. Charge it to an EL Recoverable account or net it against the vendor payable. Booking it as an expense overstates costs and distorts gross margins.

6. Skipping Form 1 for a "clean" year. Even when EL is deposited perfectly on time for all 12 months, Form 1 must still be filed by 30 June. Omitting it is a Rs. 100/day penalty and raises a red flag in TRACES reconciliation. File it without exception.

7. Ignoring the RCM obligation because "GST is nil net." The net cash flow may be zero if ITC equals RCM liability, but the procedural compliance — reporting in GSTR-3B Table 3.1(d) and Table 4(A)(2) — is mandatory. Non-reporting attracts interest and, in GST audits, can be treated as suppression of taxable turnover.

Documentation Checklist Before You Close the FY 2026-27 Books

Run this reconciliation quarterly, not just at year-end:

• [ ] Invoices from each non-resident vendor, with the billing entity name clearly visible
• [ ] Tax Residency Certificate (TRC) from each non-resident vendor, valid for FY 2026-27
• [ ] PE declaration letter from each non-resident vendor confirming no Permanent Establishment in India
• [ ] EL monthly challans (CINs) for all 12 months — April 2026 to February 2027 by 7th of the following month, March 2027 by 31 March 2027
• [ ] EL register: vendor-wise ledger showing gross consideration, EL at 6%, EL deposited, challan reference, and date
• [ ] Form 1 acknowledgement for FY 2025-26 (filed by 30 June 2026) and Form 1 preparation file for FY 2026-27
• [ ] GSTR-3B monthly extracts — Table 3.1(d) and Table 4(A)(2) for each of the 12 months
• [ ] TDS certificates (Form 16A) issued to Indian advertising contractors for all Section 194C/194J deductions
• [ ] Form 26QB/26Q returns filed and challan proofs for all TDS deposits
• [ ] Reconciliation: total advertising expense per P&L = (non-resident ad spend from EL register) + (domestic advertising payments from vendor ledger)

Provide this complete folder to your tax auditor before Form 3CD preparation begins. Clause 44 requires exact breakdowns of all payments — non-resident and domestic — along with EL and TDS status. A well-maintained register takes 30 minutes to complete each month and saves days of scrambling at audit time.

Key Takeaways

• Three parallel compliances on one invoice: Non-resident advertising payments trigger EL at 6%, IGST RCM at 18%, and potentially TDS — each with separate due dates, separate portals, and separate return obligations. Discharging one does not discharge the others.
• The billing entity decides the entire tax treatment. Confirm the "Bill From" entity on every invoice. Google India Pvt Ltd is a domestic supplier (194C/194J); Google Ireland Ltd is a non-resident (6% EL, RCM).
• The 2% EL is dead; the 6% is not. Budget 2024 withdrew the e-commerce supply levy from 1 August 2024. The advertising-services levy at 6% was never touched and applies in full to FY 2026-27.
• Disallowance is on the full expense, not the levy. An EL failure on Rs. 60 lakh of ad spend doesn't cost you Rs. 3.6 lakh — it can cost upwards of Rs. 22 lakh in additional tax, interest, and penalty once Section 40(a)(ib) fires.
• March EL is due 31 March, not 7 April. This single accelerated deadline, under the proviso to Section 8(1) of Finance Act 2016, catches more companies out than any other in the EL calendar.
• Form 1 is an annual return due 30 June — file it even for nil liability years. A missing Form 1 is Rs. 100/day in penalties and a scrutiny trigger. It takes under an hour to file if your EL register is current.
• RCM ITC is a zero-cost compliance benefit — but only if you claim it. The 18% IGST on non-resident ad spend is fully creditable in the same GSTR-3B period, meaning the net GST burden is nil. Miss the GSTR-3B entry and you have a live demand notice.