The Google Tax

The Google Tax

The Centre's decision to levy tax on cross-border digital transactions will burden the small advertiser.

Just when digital advertising is inching towards the $1-billion mark in India, the Centre's move to impose an "equalisation levy" on cross-border digital transactions will, to begin with, add at least Rs 400 crore to its kitty. The social media has taunted it as the 'Google Tax' since the levy is on "specified services received or receivable by a non-resident not having permanent establishment in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India".

The social media nomenclature comes from Google's status as the largest platform earning from Indian advertisers - including a large number of very small firms - without paying any tax. The levy is a withholding tax that the advertiser will have to pay to the government for advertising on non-resident platforms, such as Google/You-tube, Yahoo, Facebook, Twitter, Amazon or Apple. Since they are unlikely to bear the levy, small businesses will likely have to bear the additional cost of advertising on these platforms.

This move is part of The Organisation for Economic Cooperation and Development, where G20 countries have been trying to find measures to curb harmful tax-evading practices by companies that operate in multiple geographies. "A lot of global tech companies evade paying taxes by virtue of the fact that they don't have any physical establishment in India and the transactions happen in the digital space. Due to this, the government does not earn anything on the advertising revenue that is spent in India," says Bhairav Kothari, foun-der of outsourcing CFO service firm SuperCFO.

"This move is a start of the new taxation regime in India and I will not be surprised if the government widens its scope to include more companies under this eventually," he adds.

Internet advertising is becoming the largest advertising segment. According to PwC's global entertainment and media outlook 2015/2019 report, global total Internet advertising revenue is forecast to grow from $135.42 billion in 2014 to $239.87 billion in 2019, a CAGR over the period of 12.1 per cent.

All companies irrespective of their location outside India will be charged the levy of 6 per cent. "However, how this tax will interplay with the double tax treaties with different countries has to be seen in terms of whether such tax can be levied or not," says Prashant Khatore, Partner, Tax and Regulatory Ser-vices, Ernst & Young.

It is not necessary this step will lead to a lot of traffic diversion from Google and Facebook to Indian players such as Flipkart and Snapdeal because of the huge difference in their reach.

The Budget has proposed that the Indian companies who do not deduct the equalisation tax against the payments made by them to the service provider outside India and do not deposit it to the government will not be able to include it as an expense in their P&L statement and will have to pay income tax on it, says Kothari.

Pritin Kumar, Partner, Deloitte Haskins & Sells LLP says: "At present, foreign companies receiving payments for online advertisements are not subject to withholding tax (this view is supported by judicial pronouncements); however, as the levy is not part of the income-tax law, foreign companies may not be able to get any tax treaty relief and the 6 per cent levy may end up being a cost for such companies."

"The levy is exempted on transactions less than Rs 1 lakh annually but it is not clear whether it refers to the transaction amount of the payer or it refers to the amount received by the service provider," says Khatore.

Google, Facebook and digital ad agency GroupM declined to comment for this story.