Or, why it might become costlier for you to spend on international online B2B services, including ads
An additional tax of 6-8%, called an “Equalization Levy”, on international online purchases of hosting, apps, software, advertising, and advertising that costs more than Rs 1 lakh, has been proposed by an Indian government committee formed by the department of revenue, ministry of finance and the Central Board of Direct Taxes. Please note that this report is merely a recommendation.
However, readers will recall that the during the Union Budget 2016, the government had proposed a 6% equalization levy on B2B online services and advertising, which was dubbed the ‘Google Tax‘. Going beyond that, this committee has recommended that many other services – in fact, almost every conceivable online service – be brought under its ambit. Our notes:
A. Which services will be covered?
1. Designing, creating, hosting or maintenance of website.
2. Any service which involves sale of goods or services or collecting online payments
3. Online advertising or any services, rights or use of software for online advertising, as well as advertising on radio and TV
4. Use or right to use or download online music, online movies, online games, online books or online software.
5. online news, online search, online maps or global positioning system applications.
6. software applications accessed or downloaded through internet or telecommunication networks.
7. software computing facility of any kind for any purpose.
8. online collection or processing of data related to online users in India.
9. any provision, facility or service for uploading, storing or distribution of digital content.
10. digital space for website, advertising, e-mails, online computing, blogs, online content, online data or any other online facility.
Is Ecommerce covered?
It will not be levied on goods to be imported. The fact that orders are placed & payments are made on the internet will not attract Equalization Levy. In other words, what is normally understood as E-Commerce or digital Commerce need not necessarily attract Equalization Levy. Sellers or buyers selling tangible goods by using internet will not be affected, except in respect of payments for specified services.
It also won’t be applicable to services that aren’t specified: for example, if an Indian resident books hotel rooms abroad, where booking and payment is online, no Equalization Levy will be. Hospitality services are not specified services for the purpose of Equalization Levy.
The recommendations say that Equalization Levy should be chargeable on any sum that is:
– received by a non resident
– from a resident in India or a permanent establishment in India
– as a consideration for the specified digital services.
The levy will not be charged for amounts less than Rs 1 lakh for a single payment, or Rs 10 lakh of total payments made in a year by a single payer to a single party.
C. Who is it payable by?
The company which receives the payment for the transaction or service rendered.
D. What will be the rate?
Between 6 to 8 % of the gross amount.
E. What are the exemptions?
Equalization Levy would not be chargeable if the company that gets paid:
– has a permanent establishment in India.
– the money paid forms a business receipt of that permanent establishment.
– the income derived from the sum is attributable to such permanent establishment in India, and taxable under the provisions of the Income-tax Act, 1961.
F. Reporting compliance
The company which receives the payment shall file an online annual return of receipts for the specified services, if such receipts exceed Rs 10 crore. There will no such obligation if such receipts from India do not exceed Rs 10 crore.
MediaNama’s Take (Nikhil adds)
This has been a long time coming, and at one level, it addresses issues of online ventures using tax havens and complicated structuring global structuring to avoid tax. It’s not being called the “Google Tax” for no reason. However, it does create a problem if you view the Internet as a single global digital market, which allows a company in, say, Indonesia, to provide the best and the cheapest products to the rest of the world. Global competition brings efficiency and lower costs for everyone, and this means that to provide services in India, they will have to file this levy with the Indian government.
We’re not sure of how this equalization levy might be enforced, given that the company providing the service has to pay the money. How will the Indian government claim an Equalization Levy from a company that doesn’t operate in India? Will they prevent Indian companies from paying these services? If you think that isn’t possible, remember that payments go through cards and banks. Remember what happened to Paypal in India in 2010?
Now imagine if every government across the world deploys this equalization levy. How will it impact the operations of Indian B2B and SAAS startups if they have to go to every country and file taxes. It increases regulatory compliance costs for everyone. YES, there is a problem with taxation. We’re just not sure if this is the right solution for it.