What is the ‘Google Tax’ and how will it impact Indian firms?

It is upon Indian advertisers to collect the 6% tax and deposit it with the government.

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The central government has announced that, starting from Wednesday, it will impose an ‘Equalisation Levy’ of 6% on cross-border digital transactions of more than Rs 1 lakh. Dubbed as the ‘Google tax’, this is essentially an indirect tax on foreign companies like Google, Facebook and Twitter for online services they provide to Indian companies that cost above Rs 1 lakh a year.

Products and services could range from online advertisements or online advertising space to, design, creation, hosting or maintenance of websites, and so on.

The Indian government’s decision comes in the wake of ‘Operation Tulip’ by which French authorities investigated and indicted Alphabet, the parent company of search giant Google for evading back taxes of 1.6 billion Euros (US$1.8 billion).

Is this ‘Google tax’ necessary?

As an article published in March, 2016 on The Wire states, this tax is targeted towards online companies such as Google or Facebook, which provide monetised services in various countries, but route their profits through tax havens, thus avoiding legitimate taxes on their revenue.

The government has faced difficulties in bringing them under the tax net because, even where payment for services may take place in Indian currency, the payments are made in tax-friendly locations outside the jurisdiction of Indian authorities.

Indeed, in 2015, the Income-Tax Appellate Tribunal in Kolkata held that payments to companies such as Google and Yahoo were not taxable as “they could not be construed as permanent establishments or taxable presence of foreign enterprises owned and maintained in India”.

The so-called ‘Google tax’ comes along with other reforms and budgetary proposals announced by Finance Minister Arun Jaitley in his budget statement including the .5 % agricultural cess, 1% luxury tax and a compliance window for black money holders.

The projected impact

Although, some commentators have deemed this to be a positive move to tax companies accused of tax evasion in variouscountries, others have expressed the concern that it is likely to hurt small and medium Indian companies, and especially start-ups. Given the government’s apparent concern for encouraging the growth potential of start-ups, this move is therefore seen as counter-productive.

The Internet and Mobile Association of India (IAMAI), for instance, said that this was an impractical decision because it would substantially affect Indian tech-based startups.

IAMAI president Subho Ray had said, “Prima facie it looks impractical and unreasonable, the government is ready to hurt the start-ups… this is actually a tax on Indian start-ups.”

As the proposed ‘Equalisation levy’ is indirect, it falls upon Indian advertisers to collect the 6% tax and deposit it with the government. Hence it is felt that the Googles and the Amazons are simply more likely to increase the price of their products or services to recoup the taxed amount.

Thus, it is the start-ups that lose out in the bargain as the cost of doing business increases, and there are no viable alternatives to their dependence on online resources. More established companies, on the other hand, always have the option of depending on other legacy channels (such as television, newspapers, outdoor advertising, etc.) for promotions and operations.

As the cost of operation increases, the price is also likely to increase for the end-customer.

What happens if an Indian company fails to comply with the law?

According to report in DNA, if a company fails to collect the 6% equalisation levy from international companies for its expenditure on services, that expense will be calculated as a taxable profit of the Indian company.

Although the government said its decision to levy this equalisation levy was based on an OECD (Organization for economic cooperation and development) recommendation report on taxing digital companies, Medianama reported that the IAMAI claimed the government’s justification to be ‘patently false’. It pointed out that the report did not recommend immediate introduction of such a levy as an internationally agreed standard.