UPSC Prelims 2018 Q8: Indian Economy – Taxation
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer: (d) Neither 1 nor 2
Explanation
Equalisation Levy - The 6% 'Google Tax' on Online Advertising
| Statement | Claim | Verdict | Detail |
|---|---|---|---|
| 1 | Equalisation Levy is introduced as part of the Income Tax Act | FALSE | The Equalisation Levy was introduced by Chapter VIII of the Finance Act, 2016 - it is a separate, standalone levy, NOT part of the Income Tax Act. This is precisely why non-residents cannot claim DTAA benefits - EL is not 'income tax'. |
| 2 | Non-resident entities can claim tax credit under DTAA | FALSE | Because EL is NOT an income tax, it does not fall within the scope of Double Taxation Avoidance Agreements (which apply to income taxes). Non-residents cannot claim foreign tax credit for EL paid in India. |
Applicability (2018): 6% on gross consideration for online advertisement / provision of digital advertising space paid by an Indian resident (or non-resident with a PE in India) to a non-resident service provider, if total payments exceed Rs 1 lakh/year.
2020 Expansion: Finance Act 2020 added a 2% EL on e-commerce supply/services by non-resident e-commerce operators (later withdrawn from Aug 2024).
Answer: (d) Neither 1 nor 2.
Why each option is right or wrong
- (a) Incorrect. Equalisation Levy is a standalone levy under the Finance Act 2016, not part of the Income Tax Act.
- (b) Incorrect. Because EL is not income tax, DTAA credit is unavailable for it.
- (c) Incorrect. Both statements are factually wrong.
- (d) CORRECT. Neither statement is right - EL is standalone (not IT Act) and does not qualify for DTAA credit.
Key point
Equalisation Levy = standalone 6% levy under Finance Act 2016 (Chapter VIII). Deliberately kept OUTSIDE the Income Tax Act so that DTAA benefits cannot be claimed by non-resident digital advertisers.
Remember
The Equalisation Levy of 6% on online advertisement services by non-resident entities was introduced by Chapter VIII of the Finance Act, 2016 as a standalone levy - deliberately outside the Income Tax Act. This design choice means non-resident payers cannot claim foreign tax credit under DTAAs, since DTAAs only cover income taxes.
Common mistakes
- Assuming any tax India levies on foreign firms must be part of the Income Tax Act - Equalisation Levy is a distinct fiscal instrument.
- Believing DTAA covers all cross-border taxes - DTAA applies only to 'income taxes' as defined in each treaty.
- Confusing the 6% EL on ads (2016) with the 2% EL on e-commerce (2020, since withdrawn) - both are separate.
Exam tip
Design principle: If a country wants to tax foreign digital firms while avoiding DTAA leakage, the instrument must be OUTSIDE the income-tax code. EL 2016 was designed exactly for this reason.
Sources
- Finance Act, 2016 - Chapter VIII (Equalisation Levy)
- CBDT Notifications on Equalisation Levy Rules, 2016