Question map
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 :
Explanation
The correct answer is option D – Neither statement 1 nor 2 is correct.
**Statement 1 is incorrect:** Equalisation levy is not a part of income-tax Act[1]. Instead, it was introduced by way of separate chapter in the Finance Act, 2016. Like STT, it will remain[2] a separate tax. This makes it a distinct levy outside the Income Tax Act framework.
**Statement 2 is incorrect:** Non-resident service providers cannot claim tax credit against it in their home country under the Double Taxation Avoidance Agreements.[3] This is a key feature of the equalization levy – it operates outside the DTAA framework, meaning non-resident entities cannot offset this levy against their tax liabilities in their home countries.
The equalization levy was introduced in the Finance Act, 2016 which provided for a levy at 6% on the amount of consideration for any specified service received or receivable by a non-resident[4], and applies to digital services like online advertising provided by companies such as Google, Facebook, and Twitter.
Sources- [3] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > GOOGLE TAX OR EQUALISATION LEVY > p. 89
PROVENANCE & STUDY PATTERN
Guest previewThis is a classic 'Legal Nuance' trap. UPSC didn't ask 'What is the rate?' (too easy); they asked 'Which Act governs it?' and 'Does DTAA apply?'. When studying new taxes or bodies, always verify the Statutory Parent (Finance Act vs. Income Tax Act) and its interaction with international treaties.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Statement 1: Was India's 2018 equalisation levy of 6% on online advertisement services offered by non-resident entities introduced as an amendment to the Income-tax Act?
- Statement 2: Can non-resident entities providing online advertisement services to Indian customers claim a tax credit in their home country under Double Taxation Avoidance Agreements (DTAA) for the 6% equalisation levy introduced by India in 2018?
- Says the equalisation levy was enacted as a separate chapter in the Finance Act, 2016 — indicating it was not introduced by amending the Income-tax Act.
- Describes the levy as a separate tax (like STT), reinforcing that it sits outside the Income-tax Act framework.
- Directly contrasts equalisation levy with withholding tax, stating: 'Equalisation levy is not a part of income-tax Act'.
- This supports the conclusion that the levy was not introduced as an amendment to the Income-tax Act.
- States India introduced the Equalisation Levy in the Finance Act, 2016 and that it provided for a levy at 6% on consideration for specified services by a non-resident.
- Identifies the statutory origin (Finance Act, 2016) and the 6% rate, supporting that the measure came via the Finance Act rather than as an Income-tax Act amendment.
Explicitly states Equalisation Levy is not under the Income Tax law but was introduced through the Finance Act 2016 as an independent levy.
A student could check the Finance Act 2016 text or schedules to see whether the levy was inserted into the Income-tax Act or enacted as a separate statutory provision.
Contrastingly asserts the levy 'was introduced as a part of the IT Act' and gives the 6% rate and scope (digital services/online advertisement).
A student could compare the wording of the Income-tax Act and the Finance Act/notifications to see which statute contains the levy provisions.
Presents the levy as an examination question itemising the claim 'It is introduced as a part of the Income Tax Act', indicating the claim is contested/treated as a discrete factual proposition.
Use the MCQ framing to justify verifying primary legal sources (Finance Act, Income-tax Act amendments) or authoritative commentary to resolve the exam-style assertion.
Notes Equalisation Levy is a direct tax on revenue (not profit) and reiterates 'but NO income tax under Income Tax Act 1961', implying separation from Income-tax Act obligations.
A student can use this functional distinction (tax on revenue, not income tax) to infer legislative placement — likely outside standard Income-tax Act income provisions — then verify statutory location.
Describes administration (withheld by Indian payers, threshold, non-resident companies cannot claim DTAA credits) which suggests a specific levy mechanism possibly different from standard Income-tax Act withholding rules.
Compare procedural features (withholding mechanism, DTAA interaction) against typical Income-tax Act withholding rules to see whether the levy follows Income-tax Act amendment patterns or a distinct scheme.
This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.
Login with Google to unlock all statements.
This tab shows concrete study steps: what to underline in books, how to map current affairs, and how to prepare for similar questions.
Login with Google to unlock study guidance.
Discover the small, exam-centric ideas hidden in this question and where they appear in your books and notes.
Login with Google to unlock micro-concepts.
Access hidden traps, elimination shortcuts, and Mains connections that give you an edge on every question.
Login with Google to unlock The Vault.