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?

  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:

  • 1 only
  • 2 only
  • Both 1 and 2
  • Neither 1 nor 2

Answer: (d) Neither 1 nor 2

Equalisation Levy:
  • Equalisation Levy is a tax on business transaction for online marketing in which any Indian pays a sum of more than Rs.1 lakh to non-residents entities such Google and Facebook etc.
  • It was first introduced by the Finance Act, 2016. It is aimed at taxing business to business transactions.
    • It is part of the Finance act.
  • Since Equalisation Levy is outside the scope of tax treaties entered into by India with other countries, the foreign company cannot claim a tax credit in its home country.
  • Eligibility:
    • Companies with a turnover of over Rs. 2 crore, will pay this levy on the consideration received for online sales of goods and services.   
  • Purpose:
    • The purpose of the levy is to ensure fair competition, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations
  • Applicability of Equalisation Levy:
    • Equalisation Levy is a direct tax, which is withheld at the time of payment by the service recipient. 
    • The two conditions to be met to be liable to equalisation levy:
      • The payment should be made to a non-resident service provider;
      • The annual payment made to one service provider exceeds Rs. 1,00,000 in one financial year.
  • Services Covered Under Equalisation Levy:
    • Currently, not all services are covered under the ambit of equalisation Levy. 
    • The following services covered:
      • Online advertisement
      • Any provision for digital advertising space or facilities/ service for the purpose of online advertisement
      • As and when any other services are notified will be included with the aforesaid services.