Starting from June 1, 2016, India deftly applied a tax on the digital economy which hitherto escaped from paying taxes. This new tax in the town is called – the ‘Google Tax’ or the Equalization Levy.
Our Finance Minister Mr. Arun Jaitley slipped equalization levy into his annual budget of 2016-2017. According to the Budget, any payment exceeding Rs. 1 lakh a year by an Indian entity or person to a non-resident e-commerce or technology company will be charged Equalization Levy at 6% on gross payment. In other words, this tax is levied on income received by foreign companies and is deducted at source. This levy is supposed to be withheld by the Indian Company before making the payment and to be deposited with the Indian tax department.
It is specifically applied on the companies which do not have the permanent establishment in India but receives payment from Indian companies for B2B service provided.
For instance, an Indian Company advertises on Google for Rs. 1 million. Thus ideally, the Indian company should be paying Rs. 1 million Google for advertising services on its platform. But after the introduction of Google Tax, Rs 0.94 million will be paid by the Indian firm after the deduction of Rs. 60,000 as Equalization Levy at 6%.
Hence, this levy had been used by the government to collect tax from tax-evading online foreign companies, specifically, advertising firms like Google and Facebook. Equalization Levy imposes the duty on Indian merchants advertising on Amazon, Google, or Facebook and competing for SEO space to deduct this levy and deposit with the Indian government. Google Tax had facilitated the indirect, roundabout collection of tax from foreign entities through Indian companies. The foreign entities are directly taxed when the Indian party deducts the levy at 6% while making payment for the service availed such as advertisements.
The service covered under Google Tax comprises services for using digital advertising space i.e, digital and online advertising. The list is expandable anytime during the year via the notification by the government. Nevertheless, the government is expected to adopt a wait-and-watch approach until the next budget and would avoid expanding the list this year.
Q. On whom will this tax not be levied?
A. The Indian entity would not be liable to deduct Google Tax from the non-resident service provider if it satisfies the following two conditions:
- when it has a permanent establishment in India and
- the bill had also been raised by that Indian arm of the non-resident firm.
Q. What led to its introduction?
A. The online advertising firms including Google and Facebook averted paying tax by collecting almost all of their profits in tax-haven countries like Luxembourg or Ireland from all of their customers worldwide.
For example, any Indian firm availing advertising space on Google would not be making payment to Google’s India operations but to Google Ireland.
[I’d highly recommend you to read this post detailing how American companies like Google avoided paying taxes for its operations outside India- Apple and Ireland win the biggest tax battle in history]
This and similar issue had led to numerous tax disputes between India and major Silicon Valley-based companies awaiting decisions in Indian courts. The foreign entities generally avail the shelter from a Kolkata’s ITAT decision favoring them with the argument that “they could not be construed as permanent establishments or taxable presence of foreign enterprises owned and maintained in India”, these companies were therefore not liable to pay tax in India.
Updated on 20/07/2020: As already mentioned, equalisation levy was originally introduced only on revenues earned by non-resident companies like Facebook from advertising and related services. The Government had passed the Finance Act, 2016 for the same. The Finance Act 2020 amended the Finance Act 2016, introducing a new Equalisation Levy at 2% on the consideration received/receivable by an e-commerce operator from the following transactions:
- Online sale of goods owned by the e-commerce operator; or
- Online provision of services provided by the e-commerce; or
- Online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
- Any combination of the above-mentioned activities
This came into force on 1st April 2020.
The US has launched a probe against India for targetting American companies like Google, Facebook, Amazon, but India has maintained that this decision is not biased against any country.
Q. How did it come into action?
A. Equalization is a consequence of India’s tough battle confronted during a discussion on BEPS (Base Erosion and Profit Shifting) Project at the recent G-20 summit, spearheaded by OECD. Stiff opposition was encountered from technology-driven countries of the US against this option of levying the tax in the digital economy.
The prime objective of the BEPS project was to find ways to curb tax-avoidance by MNCs worldwide realized through aggressive tax planning and ensuring tax transparency.
India emerged to be the first country globally to avail of this option of applying equalization tax.
Q. What would be the implications of this tax for India Inc.?
A. Owing to the absence of sufficient homegrown alternatives for Indian merchants when it comes to platforms like Google and Facebook, so it would be the customers who are anticipated to take the hit of the levy. It would be Indian customer companies that would be expending higher charges instead of the foreign entity.
For instance, for a service of Rs.1 million, Indian firm would now be shelling out Rs.1.06 million, compensating for the Google Tax of Rs. 60,000.
Hence, while the Indian government would enjoy extra inflow in the form of tax revenue. The Government collected around Rs.550 crore in equalisation levy in 2017-18.
Indian businesses, especially start-ups and SMEs would be more significantly impacted by an increase in their marketing cost (online).
Q. Would there be no profit for Indian companies?
A. Google tax is expected to level the playfield between e-commerce players of domestic and foreign origin. In fact, Indian companies, especially e-commerce companies are expected to benefit from it.
It is a fact that most of the revenue for e-commerce companies operating in India is earned from advertisements for their respective merchants. The e-commerce companies no longer earn revenue from listing merchants on their websites.
Now, the Google Tax impacts the non-resident e-commerce companies not having a permanent establishment in India, particularly when compared with their Indian counterparts. For instance, Amazon Vs. Flipkart. With the presence of Indian alternatives to foreign companies like Amazon, the bargaining power shifted in favor of Indian sellers and merchants. This levy thereby established the balance between deep-pocket and established non-resident (foreign) e-commerce companies and domestic companies.
Other articles from Economyria that you may read:
- Goods and Services Tax (GST): Demystified
- The final structure of Goods and Services Tax (GST) – Explained
- The India-Mauritius Treaty Amendment
- Understanding General Anti-Avoidance Rule or GAAR
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