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India imposes 'Google tax'

News, 03 March 2016

NEW DELHI: The digital advertising industry in India is digesting the implications of a new tax announced in this week's Budget which some experts fear could hit start-ups and even be extended from online advertising into other business services.

The new tax, termed an "equalisation levy", will be applied at the rate of 6% on the fees paid by digital advertisers.

The Economic Times explained that "the 'equalisation' happens because the government is supposedly levelling the playing field and making companies such as Google and Facebook pay for the money they make from local advertisers".

The move – a starting date for its implementation has yet to be announced – aims to remove an anomaly in that digital platforms without a "permanent establishment" in the country are not liable to pay tax in India.

Other countries in the region have also been looking at this issue. Earlier this week, Indonesia's finance minister indicated such businesses would in future be required to "create a permanent establishment, like the contractors for the oil sector, so they can be taxed".

India's levy is, so far, limited to payments of over Rs 1 lakh a year for online advertising to "foreign e-commerce companies" without permanent establishments.

With the tax being applied to payments rather than platforms, the Economic Times noted room for bargaining between platforms such as Google and its advertisers as to who would actually pay it.

Since Google generated Rs 4,108 crore in revenue from India in 2014-15, that would seem to give it the upper hand in negotiations with all but the largest advertisers, with the new tax possible ending up as an extra cost for smaller businesses.

"Startups tend to be very reliant on these online advertising platforms, and a levy of this sort may have a more adverse impact on them than it would on the Facebooks and Googles of the world," said Shreya Rao, founder of the Law Offices of Shreya Rao.

Tax specialists expressed concerns that the wording of the proposed tax for "specified services" gave the government scope to extend what was included in this definition.

"This could be a start of a new trend of bringing more services within the ambit of an equalisation levy," said Girish Vanvari, partner and tax head at KPMG India.

Data sourced from Economic Times, Times of India; additional content by Warc staff