Question 45 from UPSC CSE 2018 - Current Affairs

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?
1. It is introduced as a part of the Income Tax Act.
2. 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:

IASCODEX · Accepted Answer

Correct Option: D. Neither 1 nor 2

Strategy: - Evaluate statements based on the Equalisation Levy's statutory placement and international tax credit eligibility.
- Recall that the Equalisation Levy is established by Finance Acts, not the Income Tax Act.
- Understand that as a non-income tax levy, it does not qualify for Double Taxation Avoidance Agreement (DTAA) credit benefits for foreign entities.
- Conclude that both statements are incorrect based on these principles.

Key Info: ### Equalisation Levy Overview

The Equalisation Levy, introduced by the Finance Act, 2016, is distinct from the Income Tax Act, 1961.

- **Initial Scope** -- Targeted Business-to-Business (B2B) online advertisement services provided by non-resident entities to Indian businesses, at a rate of 6%.
- **Expansion (2020)** -- Broadened to include e-commerce supply or services, at a rate of 2%.
- **Tax Classification** -- Not classified as 'income tax' under domestic law; it operates outside the scope of the Income Tax Act.
- **DTAA Inapplicability** -- Due to its classification, the levy is not covered by India's Double Taxation Avoidance Agreements (DTAAs). DTAAs typically provide tax credits only for income taxes as defined under Article 2 of such treaties.
- **Credit Implications** -- Non-resident entities paying the Equalisation Levy in India generally cannot claim a corresponding tax credit in their country of residence.
- **Purpose** -- Aims to tax the digital economy and address tax challenges arising from cross-border digital transactions.
- **Affected Entities** -- Primarily impacts large international technology and advertising firms.

IASCODEX · Answer

Option A: 1 only

IASCODEX · Answer

Option B: 2 only

IASCODEX · Answer

Option C: Both 1 and 2