Home/ Companies / News/  India’s Google tax may raise costs for Indian units of global firms

New Delhi/Bengaluru: The equalization levy for online advertisers that will come into effect from 1 June is likely to increase the cost of doing business for the Indian arms of global giants Google (Alphabet Inc.) and Twitter Inc. and may force Facebook Inc. to consider registering an Indian entity to compete effectively with its online rivals.

Earlier this year, finance minister Arun Jaitley, in his budget speech, announced the introduction of an equalization levy of 6% for any payment that exceeds 1 lakh a year from an Indian company to a non-resident for providing online advertisement services.

The move was aimed at indirectly taxing global Internet firms who make money from Indian advertisers but don’t fall under the purview of taxation because they are not registered in the country.

For instance, a foreign entity of social media giant Facebook collects revenues from Indian clients.

So, while this additional charge will be borne by Indian-registered entities of global firms, in cases where an Indian arm does not exist, the levy will be paid by the clients or users buying ads.

“The clients will have to pay the levy in short time till these firms set up shop in the country. Any delay in registering the company here could result in rationalization of client budgets," said C.V.L. Srinivas, chief executive (South Asia), at media buying agency GroupM.

Advertisers and media buyers are hopeful that these costs will be borne by the global firms.

“We are hoping that Facebook and Google will be smart enough to absorb the cost and not pass it on," said Sam Balsara, founder, chairman and managing director of Madison World and Madison Communications.

So, why is it going to be costlier business for those with an Indian registered entity?

Unlike a tax, the equalization levy will not get offset against anything and, hence, will be a direct hit on the companies’ profits. “This is not a regular tax and the companies will not get any credit for it," said Subho Ray, President Internet and Mobile Association of India.

Ray pointed out that there is a lack of clarity on the rules if the advertising service provider is billing from outside India. “Why should an individual or agency collect tax on behalf of entities sitting in Ireland or Singapore who will probably not even give the credit back?" he asked.

Facebook did not respond to an email seeking comment.

A Google India spokesperson said, “Google has and will continue to pay all applicable taxes and charges as per local laws in any country we operate in." However, the company did not comment on how it could impact their business.

For Google, most part of their billing happens here in India, while there are several large advertisers and marketing agencies who deal with Google, Facebook and Twitter offices outside the country.

The equalization levy is meant to level the playing field between Indian entities and foreign entities because earlier Indian firms were liable to pay tax, whereas the foreign firms weren’t, said Abhishek Goenka, partner, direct tax, PwC.

“Foreign entities that aren’t registered in India will now have to pay the levy. It may force some companies to weigh the pros and cons of setting up shop in India. Online firms that aren’t will have to see if they can afford to pay the 6% levy without hurting their business or if they want to register an India entity," he said.

The equalization levy was one of the measures suggested by the Organization for Economic Cooperation and Development (OECD) as part of the global base erosion and profit-shifting initiatives. But India became the first country to adopt this levy to tax the digital economy.

With its large population, India remains one of the largest untapped markets for global online portals and remains one of their key sources of revenue. But these global online firms do not pay any tax in India, even though they earn considerable revenue from this market. To correct this, the Indian government brought in this 6% levy in this year’s budget.

From 1 June, any Indian company that makes a payment to a global online portal for online advertisement services will have to deduct this 6% tax before making the final payment to the global firm. The obligation of reporting such transactions and tax deducted is also on the Indian company.

While this has been initially restricted to payments for online advertisements, the government may expand its scope to cover more services such as downloading of songs, movies and books, online consumption of news, software downloads and online sale of goods and services in the coming years, if one goes by the report of a committee constituted by the government to tax e-commerce transactions.

Abhay Sharma, partner, Shardul Amarchand Mangaldas and Co., said that going forward, the impact of this levy, aimed at cracking down on Internet companies, will be significant.

“India is moving towards source-based taxation. So, even if a global online firm does not have any actual physical presence in India but has a digital footprint, it can come under the tax net in India. More services will be taxed under the levy in the coming years," he said.

“It will be a definite cost for Indian companies as ultimately the cost will be pushed down to the Indian company which is advertising with the online portal because of the leverage the latter enjoys. The onus of compliance and payment of the tax is on the Indian company which is making the payment," he added.

The Indian government has deliberately introduced the levy as part of the finance bill and not the Income Tax Act to ensure that the double taxation avoidance agreements that India has with other countries is not violated. However, because of this, the online firms cannot seek tax credit in their home country for this tax paid in India and are more likely to push the Indian companies to foot the bill.

Remya Nair and Ashna Ambre contributed to this story.

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Updated: 01 Jun 2016, 04:01 AM IST
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