Previous Year Question
With reference to India’s decision to levy an equalisation 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
Correct Answer: D
Detailed Solution
India introduced the Equalisation Levy to tax income arising from the digital economy where a foreign digital enterprise could earn revenue from India without maintaining a physical presence or Permanent Establishment in the country.
The Finance Act, 2016 imposed a 6% Equalisation Levy on specified services. These principally covered online advertisements, digital advertising space and related facilities or services.
Statement 1 is incorrect
The Equalisation Levy was not introduced under the Income-tax Act, 1961. It was enacted as a separate levy under Chapter VIII of the Finance Act, 2016.
Under the 2016 provisions, the levy applied to consideration paid for specified services to a non-resident by:
An Indian resident carrying on business or profession; or
A non-resident having a Permanent Establishment in India.
The prescribed annual payment threshold was ₹1 lakh. Once this threshold was crossed, the payer was generally required to deduct the levy at 6% and deposit it with the Government.
Therefore, Statement 1 is incorrect.
Statement 2 is incorrect
A Double Taxation Avoidance Agreement generally applies to taxes covered by the particular treaty as taxes on income.
The 6% Equalisation Levy:
Was not an income tax imposed under the Income-tax Act;
Was a separate levy under the Finance Act, 2016; and
Was not automatically treated as a DTAA-covered income tax.
Consequently, a non-resident entity did not automatically become entitled to Foreign Tax Credit in its home country under a DTAA.
A foreign country may provide some relief under its own domestic law, but that does not make the statement’s categorical DTAA-based claim correct.