Bhumesh
IMPLICATIONS OF EXPANDING THE SCOPE OF GOOGLE TAX
Bhumesh Verma 18 May 2018

IMPLICATIONS OF EXPANDING THE SCOPE OF GOOGLE TAX

Introduction

Online advertising primarily promoted by digital giants such as Google and Facebook generatesconsiderable revenue for them. The Indian government with an aim to tax such revenue had introduced a new tax called the equalization levy or the `google tax’ as it is popularly called, in 2016.

This tax was introduced as a self-contained code to tax digital transactions. Google tax in simple terms is a tax levied on the consideration derived for any specified service. Specified service includes online advertising, provision of services pertaining to digital advertising and any other service (which may be notified later).

The government is now planning to expand the scope of these specified services and bring non-digital companies too within the ambit of the google tax. Such a proposal merits an analysis of the implications it might have on the economy. But before we delve into analysing this proposal, it is imperative to understand the scope of equalisation levy/google tax as it stands currently.

Scope of equalisation levy/google tax

This tax is applicable on the consideration received by a non-resident from an Indian resident or a permanent establishment in India owned by a non-resident for the aforementioned specified services. It is not applicable on non-residents who have a permanent establishment in India. The applicability extends only to Business-to Business (B2B) transactions, consideration for which exceeds an aggregate value of approximately USD 1,500 in a year. Such consideration is made exempt under the Income-tax Act, 1961in order to prevent double taxation.

All residents and foreign residents having a permanent establishment in India are mandated to withhold 6% of equalisation levy from payments made to non-residents for the aforementioned specified services. In addition, a no ‘PE certificate’ is typically required to be furnished in order to assess the applicability of equalisation levy/google tax. Delayed payments also lead to incurring of late payment interest.

Rationale behind equalisation levy/google tax

Some of the major reasons behind the imposition of an equalisation levy are as follows:

The tendency of most online companies is to shift their profits offshore. This leads to loss of revenue for the government as a digital company’s entire profit from the Indian market would go abroad. Introduction of an equalisation levy would help in retaining at least some percentage of such profits.

The equalisation levy would enable the government to earn higher revenue. The digital economy of India is growing at a rapid rate and hence not taxing online companies just because they do not have any permanent establishment in the country would mean significant losses for the government.

The imposition of equalisation levy may act as an incentive for the digital companies to set up a permanent establishment in India, because they are being taxed irrespectively.

Expanding the scope of equalisation levy/google tax

The government is further proposing that the scope of equalisation levy be expanded to include within its scope even non-digital companies. This proposal essentially means that all companies who trade in India despite not having a permanent establishment here would be liable for domestic taxation. It is being debated that such a change can have a two-pronged effect on the economy.

Taxing every company which earns a certain minimum income from the Indian markets may on the one hand lead to a massive increase in the revenue of the government whereas on the other hand, it might also deter companies from trading in India. The government argues that the income earned by companies from trading in India should not go tax-free just because they do not have a permanent establishment in India. This could translate into economic loss for the country.

However, introducing a proposal to impose blanket tax on all companies based on the quantum of their trading may not be viewed very favourably. Moreover, the entire rationale behind equalization levy is to tax companies who basing their claim on a `mere digital presence’ may seek to evade taxation. Widening this net to cover non-digital companies might not serve this purpose. Non-digital companies who merely trade with resident entities or non-resident entities with a PE in India may be deterred to do so if they have to pay domestic taxes on all their transactions and this might adversely affect investments in India.

 

Corp Comm Legal

Bhumesh Verma, Managing Partner

Soumya Shekhar, Associate

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