Context:
The central government has proposed to abolish the Equalisation Levy on online advertisements.
Equalisation Levy:
- Also known as – Digital tax or Google Tax
- A direct tax introduced in the Finance Act, 2016 to tax digital transactions, specifically income generated by foreign e-commerce entities from India.
- Scope –
- Initially applied to online advertisement services.
- Expanded in Finance Act, 2020 to include e-commerce supply and services.
- As and when any other services are notified, these will be included with the aforesaid services.
Key Features:
- Tax on Online Advertisement Services – 6% on payments to non-residents for services such as digital ad space, online ads, and related facilities.
- The levy on online advertisements to end from April 1, 2025, following amendments in the Finance Act, 2016.
- E-commerce Supply or Services (No Longer Applicable) – 2% on revenue earned by non-resident e-commerce operators (abolished on August 1, 2024)
- Reasons for Imposition –
- Ensuring Fair Competition – Created a level playing field between domestic businesses and international companies.
- Bridging Tax Gaps – Addressed loopholes where foreign companies avoided taxes due to lack of physical presence.
- Tax Contribution by Foreign Digital Companies – Ensured companies like Google, Amazon, etc., contributed to India’s tax system.
- Revenue Generation – Recognized the rapid rise in digital transactions, further accelerated by the COVID-19 pandemic.
- Concerns –
- Trade Tensions – Considered a barrier to trade by nations like the US.
- Risk of Retaliatory Tariffs – Potential countermeasures from other countries, impacting Indian firms abroad.
- Double Taxation & Compliance Burden – Absence of global tax credit arrangements led to higher costs for foreign companies.
Source: TOI
Previous Year 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:
[UPSC Civil Services Exam – 2018 Prelims]
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: (d)