With reference to India's decision to levy an equalization tax of 6% on online advertisement service

Q: What is UPSC Prelims?

UPSC Prelims is a competitive examination conducted in India. This question is from the 2018 UPSC Prelims Economy paper.

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Question

With reference to India's decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct?It is introduced as a part of the Income Tax Act.Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the "Double Taxation Avoidance Agreements".Select the correct answer using the code given below:

Accepted Answer

Correct Answer: D — Neither 1 nor 2Step-by-step Solution:Statement 1 — Equalization levy is part of the Income Tax Act: This is incorrect. The Equalization Levy was introduced in India in 2016 through the Finance Act, 2016, as a separate chapter — not as an amendment to the Income Tax Act, 1961. It was enacted as a standalone levy specifically targeting digital transactions/B2B online advertising services provided by foreign companies to Indian businesses. ✗Statement 2 — Non-resident firms can claim DTAA tax credit for equalization levy: This is incorrect. Since the levy was introduced as a separate legislation outside the Income Tax Act, it falls outside the scope of Double Taxation Avoidance Agreements (DTAAs). DTAAs typically apply to income taxes covered under the Income Tax Act. Because the equalization levy is not classified as an income tax, foreign companies cannot claim a tax credit for it in their home countries under DTAA provisions. ✗Why other options are incorrect:Option A (1 only): Statement 1 is wrong — it is a separate levy under the Finance Act, not part of IT Act.Option B (2 only): Statement 2 is wrong — DTAA relief is not available since it is outside the IT Act framework.Option C (Both 1 and 2): Both statements are incorrect.Key Concept: The Equalization Levy (2016) was India's response to the OECD/G20 BEPS (Base Erosion and Profit Shifting) initiative to tax the digital economy. Initially levied at 6% on online advertising services by non-residents. In 2020, its scope was expanded to include e-commerce supply of goods/services. Its position outside the IT Act means DTAA benefits do not apply — a significant structural feature of this levy.

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