Post liberalization, businesses were no longer restricted by their territorial limitations and thus a global market had been created for various kinds of goods and services. In the contemporary scenario, businesses have come much further to conduct commercial activities across countries without even having a physical presence. This has provided an unfair advantage to the non-resident digital businesses who earn huge profits without being obligated to pay taxes. To combat this issue, the government of India has come up with an Equalisation levy on all non-resident digital businesses.
The Indian online advertisement sector has seen a rampant growth with the emergence of Social media companies, online travel sites, android and iOS app marketplaces who derive colossal amounts of profit from digital advertisements. These companies belonging to the digital tax world use ad banners hosting, target ads and other mechanisms to generate revenue without even having a physical presence in India. In furtherance, the telecommunication industry, media companies both from regional and foreign origin are using the digital platform to increase their potential reach to the public. The players in the digital sector have been able to accrue huge revenues without paying the applicable taxes to the Indian government. The tax base of India has been eroded by the digital sector by shifting profits to the foreign countries. Thus, a need was created for the Indian government to come up with the Equalisation levy tax system. The taxing rights vested with the jurisdiction to which the “economic allegiance” was owed to.
According to Forbes, many digital companies avoid payment of taxes for example “A portion of Google’s profits are paid to an Irish affiliate as royalties on its patents (which are taxed at a lower rate). To further avoid taxes, this money is then routed to the company’s Dutch subsidiary, Google Netherlands Holdings BV. From there, the company transfers its revenue to another affiliate, Google Ireland Holdings, which is based in the notorious tax haven of Bermuda—but registered in Ireland… So there you have it—double Irish with a Dutch sandwich.”
According to the Finance Bill, 2016 an equalisation tax of 6% has been levied on a few specified digital services. This tax is only levied on B2B transactions and thus other transaction of non-commercial nature are excluded from its purview. The equalisation tax was levied in order to provide a level playing field for companies functioning in the digital market irrespective of their physical market presence.
Impact on the Digital sector in India
The introduction of the equalisation levy is going to have both positive and a negative impact on the digital sector in India. The major players who are going to be effected by this levy are-
– Social media companies, internet search engines, media websites, e-commerce companies, apps and games developers who lack a physical presence in India.
– Broadcasting network companies who charge the regional companies for advertisement using the means of television and radio broadcast.
– The additional tax burden will indirectly fall upon small scale businesses in India, start ups and e-commerce websites as the foreign companies control the digital market.
– The intermediaries dealing with digital ad services such as ad & website management and advertisement trading agencies.
An introduction of a tax regime usually effects both the supply and demand in that sector. On the supply side of the digital sector are all the internet search companies (e.g., Yahoo), but also social media companies (e.g., Facebook and You Tube), digital marketing companies (e.g., Web chutney) on whose networks the entire digital network functions. On the other hand, the demand side consists of domestic companies. The amount of money spent on ads has “grown by 15.5 per cent in 2016 to Rs.57,486 crore, with digital ad expanding at the fastest pace of 47.5 per cent to Rs. 7,300 crore and accounting for 12.7 per cent of all ad spending.”
The equalisation levy can be considered as a one-sided command of nations. On the off chance that states choose to assess on a one-sided premise with no kind of co-appointment or concurrence with the partner relating state, the same income may get taxed more than once which would inhibit free trade. It is imperative that development among nations requires ‘a consensus based approach’. A one-sided levy would just be an expense to business, requiring separate administrative compliance and make the taxation framework more complex. Therefore, equalisation levy would just create complexities for businesses with little or no effective resolutions.
If we consider the example of start ups who spend huge costs to advertise their product or service in order to reach a wider audience will be adversely effect by the equalisation burden as it would draw up ad costs, thereby killing innovation. Due to the high cost of advertisements, the customer base and growth for new companies will be hindered. In furtherance, it is believed that “At a time when India is riding on a start-up & digital wave, Government has decided to punish those who attempt to embrace the new digital media.”
The equalisation levy would translate into start-ups ending up paying 6% over the GST, which they were already paying before the levy, making digital advertisement more expensive for local Indian advertisers. The Internet and Mobile Association of India (IAMAI) has said “Considering that the incidence of 6 per cent levy will be passed on to the advertisers by the ad platforms, the total burden to SMEs and tech startups on account of equalisation levy would be an additional burden of Rs 429 crore. This is nearly a 50 per cent hike over Rs. 906 crore of service tax of 14.5 per cent they pay to use the ad platforms, it added.”
The equalisation tax may also discourage foreign companies to conduct economic activities in India as they would not get a tax deduction in their home country, thus leading to a situation of double taxation for them. On the contrary, the equalisation levy could backfire if the foreign companies shift the tax burden to the Indian players as they have a significant digital market presence and control.
There are intrinsic issues regarding consistence of tax collection as neither the Finance Act, 2016 nor the Central Board of Direct Taxes has given clear rules how they intend to extract the taxes that is imposed on the occupants. Accordingly, there is a great deal of perplexity and pointless shift of burden. There is likewise a probability that an equalisation levy could transfer expenses to local consumers, depending on the economics. In such cases, this is plainly not the best arrangement, as it essentially transfers the taxation onus on local consumers.
In “the global scenario regarding imposition of similar kind of levy, it should be noted that India is not the only country to have imposed a tax to address the concerns arising from the ability of digital multi-national enterprises to avoid paying taxes in the jurisdiction from where they are earning their income.
1. UK has imposed a ‘Diverted Profit Tax’ from 1.4.2015 to address these concerns.
2. Australia has imposed a ‘Multinational Anti Avoidance Law’ from 1.1.2016.
3. Italy is reported to be considering a new ‘Digital Tax’ consisting of 25% withholding tax on payments.
4. Some countries, like Brazil already impose withholding tax on such payments.
These instances, along with the fact that the G-20 and OECD countries now agree on the rights of every country to impose any of the actions identified in the BEPS Report on Action, is a clear indication that countries across the World are thinking about it. Compared to the taxes being imposed in other countries, the Equalisation Levy proposed by the Committee is completely in accordance with the international consensus and suggestions.”
Equalisation levy was aimed at e-commerce transactions taking place irrespective of national territorial boundaries. It intended to provide level-playing field between e-commerce players of domestic and foreign origin wherein Indian e-commerce companies are expected to benefit from it but it rather seems that a larger impact would be on start-ups and mid-sized businesses bearing the tax burden in a practical sense. The equalisation levy or Google Tax is making businesses reshape their business strategies. There are various challenges to the equalisation levy but it can be considered as a positive step taken by the government to control and gain revenue from the digital market in India.
1. Bret Wells & Cym Lowell (2011):”Tax Base Erosion and Homeless Income: Collection at Source is the Linchpin,” Tax Law Review, Vol. 65, pp. 535- 618.
2. “Google Moved Billions Of Dollars To Bermuda To Avoid Taxes… Again,” Forbes, February 19, 2016. http://www.forbes.com/sites/abigailtracy/2016/02/19/google-moved-billions-of-dollars-to-bermuda-to-avoid-taxesagain/#55e2021022a2
3. “Equalisation Levy – Know about Equalization Features, Penalty & Applicability.” ClearTax, ClearTax, 29 May 2019, https://cleartax.in/s/equalisation-levy.
4. Committee on Taxation of E-Commerce, ‘Proposal for Equalization Levy on Specified Transactions’, 2016. P.75. Available at: http://incometaxindia.gov.in/news/report-of-committee-on-taxation-of-e-commerce-feb-2016.pdf
5. http://bestmediainfo.in/mailer/TYNY2016IndiaReport.pdf According to the Press Release for their 2017 report, “India remains, by far, the fastest growing market in the world’s ten, $10B plus ad markets. Growth is forecast at 13.8 per cent in 2016 and 12.5 per cent in 2017, with an economy fueled by low interest rates, sustained urban demand and the impact of key reforms.”
6. Equalisation Levy is going to create a huge problem for startups,’ Forbes, December 21, 2016. http://www.forbesindia.com/article/special/equalisation-levy-is-going-to-create-a-huge-problem-for-startups/45175/1
7. ‘Digital Advertisement Will Be Taxed in India; Anti-Startup Move?’, Trak, March 2, 2016. http://trak.in/tags/business/2016/03/02/governments-anti-startup-anti-digital-move-6-equalisation-levy-digitaladvertisements-india/
9. Equalization Levy, 2016 Is It Equitable? – Deloitte US. https://www2.deloitte.com/content/dam/Deloitte/in/Documents/technology-media-telecommunications/in-tmt-equalization-levy-2016-noexp.pdf.
10. Guest, and Guest. “Some Problems with Equalisation Levy.” IndiaCorpLaw, 19 Dec. 2017, https://indiacorplaw.in/2017/12/problems-equalisation-levy.html.
11. Proposal for Equalization levy on Specified transactions, February, 2016, Prepared by the Committee on Taxation of E-Commerce formed by the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India.