Section 165: The Equalisation Levy That Brings Digital Giants Under India’s Tax Net

The Indian Income Tax Act, 1961, is a vast legislation covering a wide range of scenarios. From individual salaries to complex corporate structures, it ensures that every type of income is taxed fairly. One such significant yet lesser-known provision is Section 165 of Income Tax Act.

This section has two important aspects:

1. It deals with the Equalisation Levy under Section 165 of Finance Act, introduced to tax digital transactions.
2. It covers the charge of tax in case of oral trusts, where a trust is not formally written but still recognized under law.

Let’s break down these elements & understand why Section 165 is an essential part of the Indian tax system.

Equalisation Levy under Section 165 of Finance Act

The digital economy has grown rapidly in India, with global companies offering services without having a physical presence here. To tackle tax leakage from such cross-border digital services, the government introduced the Equalisation Levy under Section 165 of Finance Act in 2016.

Here’s how it works:

• The levy applies to online advertising & digital services provided by non-residents.
• Indian businesses or individuals paying for such services must deduct the levy at the prescribed rate.
• The tax ensures that even foreign digital giants contribute to India’s tax revenues.

This was a landmark move because it recognized the challenges of taxing digital transactions in a globalized world.

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The Applicable Rate of Tax is 6% of the Gross Consideration

When it comes to the equalisation levy, the applicable rate of tax is 6% of the gross consideration paid to non-resident digital service providers.

For example:

• If an Indian company pays ₹10 lakh to a foreign digital advertising platform, it must deduct 6% (₹60,000) as equalisation levy before making the payment."
• The deducted tax is deposited with the Indian government.

This straightforward system ensures compliance while keeping administrative burden low. Importantly, the responsibility lies on the payer (Indian resident), which makes collection more efficient.

Charge of Tax in Case of Oral Trust

Another interesting aspect of Section 165 of Income Tax Act relates to trusts. Generally, trusts are created through written deeds. However, under Indian law, even oral trusts are recognized in certain cases.

The Income Tax Act provides clarity by including a charge of tax in case of oral trust. This ensures:

• Income generated by oral trusts is not left untaxed.
• Trustees or beneficiaries are held accountable for taxes.
• Transparency & fairness are maintained in the system.

This provision is crucial because it prevents misuse of oral trusts for tax evasion while also acknowledging their existence in traditional or informal setups.

Section 165 Allows Taxpayers to Claim Deductions for Losses and Expenses

Tax law is not only about levying taxes; it also recognizes genuine business hardships. Section 165 allows taxpayers to claim deductions for losses & expenses, ensuring fairness.

For instance:

• If a taxpayer incurs legitimate business expenses, these can be deducted while computing taxable income.
• Losses under certain heads may also be carried forward or set off against future income."

This balance of taxing income while allowing relief for expenses is what makes the Income Tax Act equitable. Section 165, therefore, plays a dual role: ensuring tax collection while supporting taxpayers’ rights.

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Practical Example of Equalisation Levy

Consider a start-up in India that spends ₹20 lakh annually on online ads with a foreign platform. As per Section 165 of Finance Act, it must deduct 6% of the gross consideration (₹1.2 lakh) as equalisation levy.

• Without this levy, the foreign platform might escape Indian tax liability.
• With this provision, India ensures tax is collected at the point of payment.

This is a practical demonstration of how taxation adapts to changing business environments.

Broader Impact of Section 165

1. Digital Economy Compliance – Ensures foreign companies pay their fair share.
2. Trust Governance – Provides clarity on oral trusts, which are otherwise prone to misuse.
3. Taxpayer Relief – Allows taxpayers to claim deductions for losses & expenses.
4. Simple Rate Structure – Clear provision that the applicable rate of tax is 6% of the gross consideration, reducing confusion.
5. Revenue Protection – Safeguards government income in a rapidly evolving economic landscape.

Why Section 165 Matters

In today’s interconnected world, laws must evolve with business practices. Section 165 of Income Tax Act reflects this adaptability:

• It tackles modern digital taxation challenges.
• It provides solutions for traditional legal structures like oral trusts.
• It balances revenue collection with fairness to taxpayers."

This blend of tradition and innovation makes Section 165 a unique & vital provision in India’s tax system.

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Conclusion

Section 165 of Income Tax Act is a powerful provision with multiple dimensions. It governs the Equalisation Levy under Section 165 of Finance Act, where the applicable rate of tax is 6% of the gross consideration for digital transactions. It also addresses the charge of tax in case of oral trust while ensuring that the law allows taxpayers to claim deductions for losses & expenses.

In short, Section 165 strengthens India’s tax base, adapts to digital business realities, and ensures fairness for taxpayers.

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