Q. 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: (UPSC Prelims 2018)
Answer:
Neither 1 nor 2
Notes: The correct answer is
[D] Neither 1 nor 2. The Equalisation Levy, often called the "Google Tax," was introduced to address the challenges of taxing the digital economy.
- Statement 1 (Incorrect): The Equalisation Levy was introduced by the Finance Act, 2016, but it is not a part of the Income Tax Act, 1961. It is a separate set of provisions aimed at taxing payments made to non-resident entities for digital advertisement services.
- Statement 2 (Incorrect): Since the Equalisation Levy is not part of the Income Tax Act, it generally does not fall under the scope of Double Taxation Avoidance Agreements (DTAA). Most DTAAs apply only to taxes covered by the Income Tax Act. Therefore, non-resident entities usually cannot claim a tax credit in their home country for the 6% levy paid in India.
The levy applies to payments exceeding 1 lakh per year made by a resident Indian (carrying on business) or a non-resident with a permanent establishment in India to a non-resident service provider for online advertisements. In 2020, its scope was expanded (at a 2% rate) to include e-commerce supplies and services.Historically, this was a unilateral measure by India, aligning with the OECD's Base Erosion and Profit Shifting (BEPS) Project Action 1. However, with the global consensus on "Pillar One," many countries are transitioning toward a unified global tax framework.