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:
Detailed Explanation:
Answer: Option 1 — None
Both statements regarding India's equalization tax of 6% on online advertisement services are incorrect.
❌ Statement 1 – Incorrect: The equalization levy was introduced under the Finance Act, 2016 as a separate tax, not as a part of the Income Tax Act, 1961.
❌ Statement 2 – Incorrect: Since the equalization levy is not classified as an income tax but as a separate levy on specified transactions, non-resident entities cannot claim tax credit in their home country under Double Taxation Avoidance Agreements (DTAAs), which typically apply only to income tax.
📝 Short Notes: Equalization Levy
| Aspect | Details |
|---|---|
| Introduction | Finance Act, 2016 (effective from June 1, 2016) |
| Legal Framework | Separate tax levy, not part of Income Tax Act, 1961 |
| Initial Rate & Scope | 6% on online advertisement services and related services by non-resident entities |
| Expansion (2020) | 2% levy on e-commerce transactions exceeding ₹2 crore annually |
| Threshold | Applicable when annual payment exceeds ₹1 lakh (for advertisement services) |
| DTAA Applicability | No tax credit available under DTAAs as it is not an income tax |
| Objective | Tax digital economy transactions where service provider has no permanent establishment in India |
| Recent Development | 6% levy on online advertisements abolished from April 1, 2025 |
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