The government is proposing to extend the Equalization Levy for almost all online transactions. It recommended that many other services, even simple online activities such as sending and receiving emails, downloading content and even blogging, would be brought under its ambit.

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‘.

Here are what people saying about the levy:

sivaSivaramakrishnan Narayanan, founder of a start up in stealth mode

The Equalization Levy proposal is very painful for software / high-tech companies and it goes against the Government’s mantra of Make in India and sell everywhere.

Many small to medium sized tech companies in India use Software as a Service (SaaS) providers like Amazon Web Services, Google Cloud Platform, Heroku, Dropbox, LinkedIn, Facebook. If anything, these cloud services have given Indian companies the tools that are necessary to build a world class product. A big chunk of their costs are cloud services costs in the range $10k-$500k a month. This can include infrastructure as a service, API services and digital advertising.

There are two issues with the proposal:

(a) it cannot be implemented and enforced meaningfully

(b) this is premature taxation on a nascent and promising industry

While the proposal says that the company that receives the payment is responsible for payment, it is entirely conceivable that the costs will be passed on to the buyers. Furthermore, what happens when a foreign firm is not compliant with the rule? There are many smaller SaaS players who may be unable to comply with these requirements. This requirement will become yet another tool to harass fledgling companies in India.

More importantly, much like the mobile revolution has helped India skip over the landline phase, SaaS will enable budding entrepreneurs from India, who would otherwise have immigrated to other countries, to build a global business out of India. Startups will simply choose to establish a parent entity in Singapore or US and make their transactions from there, thus avoiding this levy. This would be a great loss to India.

For a datapoint in this regard, Facebook’s revenue from India stand at abut 120 Cr (source) which is 0.1% of it’s overall revenue. Is the Indian govt really going after Facebook for a paltry 7Cr and willing to risk losing star entrepreneurs and companies?

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anand jainAnand Jain, Co-founder at CleverTap 

At CleverTap with hundreds of customers in India, we think this is a regressive move. For any global company that invoices Indian customers, they’ll end up adding the Equalization Levy on the customer’s invoice.

This will make purchase of software, ads, etc. more expensive for the Indian company. They’ll end up paying more for the exact same product just because they’re located in India.

I think this is bad for businesses in India, which routinely buy software from global biggies like AWS, Google, Atlassian, etc. I think they should be able to freely choose any software that works for them without having to worry about extra costs due to some bad decisions by the Indian government.

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shashikantShashikant Kore, co-founder at Karooya Technologies

Our company does utilize bunch of online services for which we pay in foreign currency. Here are my thoughts on this levy. All of our payments for international services are done with credit cards. The banks issuing the credit card charge 4% additional fees as currency conversion charges. (Typically, it is 3.5% charges + service tax.) This fee is applicable on all the transactions, however small. I believe, this fees is extraordinarily high.

While the additional levy on international transaction hurts monetarily to the companies, the overhead associated with compliance is much higher.

Instead, here’s a suggestion.

Govt should ask banks to reduce their fees to 1%. Then, government can impose a levy of, say, 4% on such transactions. Banks can collect the entire 5% fees for each transaction and deposit 4% levy with Govt directly.  This will eliminate the compliance requirement for each company/individual to just a few banks. The cost of transacting online for companies/individuals goes up marginally from 4% to 5%, which isn’t that bad.

Our currency, Indian Rupee, has depreciated almost 50% against USD in last 5 years.  That is, the cost of international services has gone up by 50% due to falling Rupee.

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Anurag SinghAnurag Singh, founder and CEO at markt.ooo 

Several digital advertising companies operating internationally don’t charge a Service Tax when offering services in India basis the claim of not having a permanent establishment in India.

One issue this leads to is that price parity for same services is not maintained for e.g. say an App Install campaign with a CPI of Rs 100 is billed at Rs 100 by the International co but as Rs 115 (approx) by an Indian company, in some way therefore a Brand may prefer to buy the Install (assuming performance aspects being similar) from the international company.

Also paying party is usually responsible for all tax deductions. For e.g. Paying party must deduct either 2% (for advertising services) and 10% for other services before paying the Amounts to the Service Provider – tax authorities hold paying party responsible. Read more here. My guess would be that paying party would have to deduct appropriate amounts for any Equalisation Tax

Note that this TDS while deducted for Indian companies is not deducted for International companies hence the Indian Company is paid Rs.90 + 15 tax = Rs.105 but has to pay Rs.15 still towards service tax in effect from a cash flow perspective they get Rs.90 or Rs.98 only whereas International co’s get Rs.100 hence also enjoy cash flow advantages – these numbers become manifold when considering that over all billing may be in the region of 1000 crores + for international co’s (barring Google)

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What are your thoughts on the Equalization Levy and how would it affect your business? Let us know in the comments or email us