By Somya Pahi Jena, NALSAR, Hyderabad

The Finance Minister, Arun Jaitley, in his budget speech in 2016, announced the imposition of an equalisation levy or the Indian version of a ‘google tax’ to be enforced from the 1st of June, 2016. In furtherance of the same, the Equalisation Levy Rules, 2016 were published in the official gazette; Section 179 of the Finance Act, 2016 authorised the Central Government to make the rules imposing the equalisation levy.

Through the equalisation levy, the Government of India has imposed a 6% tax on the income accrued to all e-commerce companies that are not permanently established in India. As per the levy, any individual, institution or entity, making a contribution in excess of ₹100,000 for business to business (B2B) services in a year will be required to hold back 6% of the gross amount payable as an equalisation levy to be paid to the government. The tax is applicable only to those foreign companies that do not have any permanent establishment in India and is inapplicable to business to consumer (B2C) services. The specified services as per the rules include any digital advertising space or any service for the same.

The rationale for the levy was derived from India’s commitment to the Organisation for Economic Co-operation and Development’s ‘Base Erosion and Profit Shifting Action Plan’ (BEPS). Action 1 of the OECD’s BEPS aims to prevent the shifting of profits from high tax jurisdictions to low tax jurisdictions and to ensure that these online companies pay taxes for the enormous profits that they earn in countries across the globe and do not get away on the pretext of not having permanent establishments in the countries.

Google Tax around the World

Previously, it has been seen in other European nations such as the United Kingdom, Germany, Belgium and Spain, that e-commerce multinationals and local online businesses have suffered at the hands of the ‘Google Tax’ and caused significant economic damage. In the UK, Google had amassed revenues amounting to $5.6 billion in 2013 out of which they paid a meagre sum of $20 million as corporate tax since they routinely complete all their European transactions through their regional headquarters in Dublin, which has one of the lowest corporate tax rates in the region. It was only in the early weeks of January 2016, that the search giant reached an agreement with the British tax authorities to pay arrears worth £130 million accrued between 2005 and 2015.

In Spain, an Intellectual Property Law was passed in October 2014 that imposed fees upon online news aggregators like Google News for showing snippets and links to news stories in order to protect the local print media industry. A study commissioned by Spanish publishers showed that the law had done significant damage to the Spanish news industry, in that, the revenue loss calculated at $10.9 million would have to be borne by smaller publishers. Additionally, consumers were able to access very limited content and it affected not only Google, but also Spanish news aggregators detrimentally. Ultimately, the increase in cost of doing business caused Google News to shut down its operations, causing a set of smaller Spanish players like NiagaRank, Planeta Ludico, Multifriki and InfoAliment to follow suit, leading to a significant loss of traffic, as per the study by the NERA.

A similar law was passed in Germany which resulted in Google News delisting local publishers from the app altogether, following which the publishers eventually asked to be relisted, seeing a plummet in their online traffic owing to Google’s overwhelming market power.

Effects of the Google Tax in India

The Tax Burden

Since the Google Tax has been introduced through the Finance Bill and not the Income Tax Act to meet with the Government’s commitment to its double taxation avoidance agreements with other nations, companies do not have the ability to seek the benefit of tax credits in their home country for the tax paid in India. With multinational e-commerce companies unable to claim the credits of the levy, the burden of the levy will not be offset and will be a direct hit on company profits. In such a scenario, the actual burden could rise to 7-8% because of grossing up of the taxation levy.

As per status quo, the major companies affected by this levy such as Facebook, Google, Amazon and Yahoo already shift additional cost or tax burdens to their customers. They are most likely to follow suit with the new Equalisation Levy and the consumer would end up having to bear the brunt of online advertising plus the tax.

“In most cases, multinationals are only going to pass on the additional cost of equalisation levy to the customers. This is especially true in cases where the multinationals are market leaders and therefore they can afford to pass on the cost to the consumers,” said Amit Maheshwari, a partner at Ashok Maheshwary & Associates, LLP.

The Digital Market in India

In a bold move by the Government, India is the first and only nation which has started taxing online transactions as per its commitment to the OECD Base Erosion and Profit Shifting Action Plan (BEPS). This however, becomes a cause for concern given that the digital market is in its nascent stage in India, and steps like this could hamper the growth of small business owners and budding domestic start-ups.

This move has two distinct effects, one on foreign advertisers and on domestic businesses with an online presence. Since unregistered foreign entities will have to bear the cost of the levy, it may dissuade alternate foreign advertisers to Google, Yahoo and Facebook to set up shop in India altogether if they are unwilling to bear the levy or to register an Indian entity. This also greatly affects the ability for small online businesses to effectively cement their place in the World Wide Web if the cost of marketing promotions or advertising becomes more expensive. It ultimately is a tough ask for these small companies as the levy would put the burden of compliance and payment on them wholly.

Further, if the net of the Google tax is extended to downloading of apps on smartphones, artistic content like music downloads and online sale of goods and services, the domestic online market will take a critical hit and budding companies, including foreign or Indian online advertisers, will be pushed out of business by the e-commerce giants.

In light of India’s digitisation drive through programmes like Digital India and creating infrastructure for a cashless economy, it is one of the most lucrative untapped markets for multinational corporations with global online portals and can potentially be a key contributor to their revenues. However, this objective of the present government may take a huge hit with imposition of such levies and the probable widening of its net to essential online services that made the web portals so successful in the first place.

While the levy would mean a source of tax revenue in the short run, it may have devastating impacts for Indian businesses and our nationwide digitisation drive in the long run, if we are to heed the lessons learnt from other countries’ experience with the Google tax. Only time will tell if commercial prudence prevails over administrative rigidity and myopia.