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The 15% service tax applicable on services being imposed on digital services will see its biggest impact soon: Paid applications and content available on the Google Play Store will attract a service tax of 15%. In a response to a query from MediaNama, the company sent the following statement:

“The new 15% service tax, announced by the Government of India on 9 Nov 2016 effective from December 1, 2016 for digital services provided by non residents will be applicable on the B2C sales (i.e. to non business customers in India) like Google Play store.”

The tax applies on all digital products and subscriptions purchased from outside India, including e-books, movies, cloud storage services, and other digital products. The government of India has amended key provisions in the rules that determine taxability of services provided in non-taxable areas (Place of Provision of services rules) to bring electronic services under the service tax net.

Google absorbing the tax hit?

What is not clear is whether Google is absorbing this cost, or will be charging Indian users an additional 15% for purchases. We checked yesterday, and it appears that so far, no additional charges are being levied on users. NetFlix, as we had reported yesterday, is absorbing the cost, and has reduced its base cost in India to, for example, Rs 435 from Rs 500, to accommodate the cost in a manner that users don’t have to pay an additional fee for content it provides. Google, of the other hand, is much less likely to do this over the long term, since the Play store is more of a marketplace for buyers and sellers of apps (in the millions), while Netflix is a content subscription service, with monthly charges, a comparatively small user base, and has only just entered India. The potential hit that Google might face is far greater, given the proliferation of Android devices in India, and in our opinion, it is only a matter of time before this cost gets passed on to users. We don’t know, though, how many apps are actually paid for by users in India. Google recently tied up with Idea Cellular for carrier billing in India, the first deal of this kind for the company.

It’s also worth noting that many app developers price content and services differently in India, as opposed to globally. In order to retain price, some of them might also change pricing.

Note that unlike Netflix and Google (for now), Digital Ocean, a hosting provider, started charging the tax in India without reducing the base price.

The additional taxes that online businesses pay

We’ve seen an increase in taxation in India over the years, as policies have changed to enable taxation of online businesses providing services in the country, whether from within or outside India. It began with the new government, in 2014, imposing a service tax on online advertising (which also impacted MediaNama). Then states began imposing an “equalisation levy” tax on ecommerce businesses that delivered across state lines.

Earlier this year, an equalisation levy was placed on online advertising, which was followed by the move to include service tax for online games, movies, music and software.