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:
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Explanation
Statements 1 is incorrect
- Equalisation levy is a direct tax levied on online transactions/payments made to non-residents for providing specified Services to a resident in India. The government introduced this tax to help Indian service providers to compete with foreign service providers and provide fair competition. The levy on the digital economy was first introduced in the 2016 Finance Act (not part of income tax) at 6% as (effectively) a Digital Services Tax on non-resident providers of online advertising.
Statement 2 is incorrect
- Non-resident entities cannot claim a tax credit in their home country under Double Taxation Avoidance Agreements (DTAs) because the Equalisation Levy is not classified as an income tax. Instead, it is a distinct levy imposed on specified services provided by non-residents to residents.
- Note: The Government of India abolished the 6% Equalisation Levy on online advertisements, effective from April 1, 2025.
