Google tax or Equalization levy

Introduction to Google tax or Equalization levy

The ‘Google Tax’ or ‘Facebook Tax’ which was first announced in the FY17 budget statement by Finance Minister Arun Jaitley will be levied from June 1 2016. Here’s all you need to know about it — what Google Tax is, who will pay it, and its implications —

As the name suggests, it’s got something to do with e-commerce companies.

The Google Tax was announced to introduce a tax on the income as accrue to a foreign e-commerce company outside of India. Google Tax or ‘equalization levy’ as it’s called in India, is expected to impact the bottomlines of giants like Google, Facebook, and others. 

So What Is This Google Tax (Or Amazon Or Facebook Tax)?

According to the Budget announcement, any person or entity that makes a payment exceeding Rs 1 lakh in a financial year to a non-resident technology company will now need to withhold 6% tax on the gross amount being paid as an equalization levy. The said rule is applicable when the payment is made to companies that don’t have a permanent establishment in India. This tax, however, is only applicable when the payment has been made to avail certain B2B services from these technology companies.

What Are The Services That Fall Under Equalization levy Rule?

Specified services include online and digital advertising or any other services for using the digital advertising space. This list, however, may be expanded soon.

Why Has The Equalization levy Been Introduced?

The tax has been aimed at technology companies that make money via online advertisements. Their revenue is mostly routed to a tax haven country. This tax will help bring the said companies under the tax radar in India. With this new tax, India has also joined the list of other Organization for Economic Cooperation and Development (OECD) and European countries where a similar tax is already in place.

Who Will It Impact?

If you’re a business owner, especially running a small business or an online start up, and you use Facebook or Google for advertising and marketing promotions, then the Google Tax will impact you.

Let’s take an example: assume that A runs a company and is liable to pay Rs 5 lakh to a foreign company to advertise with them.

With the new tax in place, A will have to withhold 6% of the amount – i.e. Rs 30,000 – and pay the balance Rs 4.7 lakh to the foreign company for its services. The withheld amount will be paid to the government.

It remains to be seen whether the foreign company will stand to bear the loss by simply accepting lower margins because of the new tax or will they hike the advertising rate taking the new tax into account?

If the latter happens, which is most likely, the Indian business owner, in this case, A, will bear the loss.

A’s overall billing will likely shoot up by about 6%, which means he will have to pay Rs 5 lakh plus taxes. So his total payout may go up to Rs 5.3 lakh.

What If An Indian Business Owner Or Company Fails To Deduct This Tax?

The Budget has proposed that any Indian business owner or company that fails to deduct this tax or equalization levy or doesn’t deposit it with the government, then the company will not be allowed to consider the expenses in calculating taxable profits. This will increase the taxable income, thereby hiking the company’s tax liability. Equalization Levy was introduced in Union Budget 2016-2017 of India. The finance Act 2016 envisages a separate CHAPTER VIII ‘Equalization levy’ in accordance with the Organization for Economic Co-corporation and Development (OECD)’s view as part of the global Base Erosion and Profit Shifting (BEPS) recommendation to tax e-commerce transactions.

One of the salient features of the Equalization levy is that the tax is aimed at the E-commerce business transaction which is conducted without regard to national territorial boundaries. Further, the equalization levy would be 6% of the amount of consideration for 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 establishment in India. And there would be no levy, if aggregate amount of consideration does not exceed 1 lakh in any previous year.

The Impact Of Equalization Levy On The Industry:

The services at which this tax, also gaining popularity and dubbed as Google Tax, is levied include online advertising or providing digital advertising space with the primary aim of levying tax on the income generated by internet  giants from Indian advertisers. The equalization levy is imposed on the payment of the advertisers and has introduced India e-commerce industry to a new kind of tax.

 It will affect the business of e- commerce giants which do not have permanent establishments in India. Internet giants like Facebook and online start – ups which receive payments from Indian advertisers will also be largely affected. The tax has come into effect from 1^st June 2016 along with Equalization levy rules, 2016 notified by Central Board of Direct taxes