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 codes given below:

The correct answer is D, as neither statement is correct. The equalisation levy was introduced through Chapter VIII of the Finance Act, 2016, not through the Income Tax Act. It was a separate levy collected by deduction at source from the Indian payer, so it sat outside the Income Tax Act's framework.

• Statement 1 is wrong. The levy was a standalone charge under the Finance Act, 2016, and the Income Tax Act was not its legal home.
• Statement 2 is wrong. Because the equalisation levy is not an income tax covered by the DTAAs, a non-resident cannot claim a treaty credit for it against home-country tax. This is why the levy was controversial with foreign digital firms.

Core concept: the levy taxed the consideration for digital services where the company had no permanent establishment in India. It links to the Mains theme of taxing the digital economy and the limits of the permanent establishment concept.

Update: the 6% online advertisement levy was withdrawn with effect from 1 April 2025 through the Finance Act, 2025, so it is no longer in force.

Trap: students see "equalisation" and "6%" and assume it is an income-tax-type levy covered by treaties, then mark statement 2 as correct.