At a time when India is riding on a startup & digital wave, Government has decided to punish those who attempt to embrace the new digital media. In a move which has been hailed as ‘greedy’, Government will now charge an equalisation levy of 6% on digital advertisements purchased by Indians.
This is a smart, cunning move, as Government is not imposing a direct tax on digital advertisement platforms, but indirectly taxing those international firms which provide such digital advertisement services. In short, its a move to tax companies like Google, Facebook and to make it more expensive for local Indian advertisers to choose digital medium for promoting their business.
Google, Facebook, Twitter and other major platforms which offer advertisement platforms have refused to comment as of now. Internet and Mobile Association of India is also silent on this matter, as of now.
What Exactly Is Equalisation Levy?
In the budget speech, Finance Minister Arun Jaitley shared that any Indian company which pays more than Rs 1 lakh to ‘foreign digital companies’ for digital advertisements would now pay an ‘equalisation levy’ of 6%.
Now, considering that these companies don’t have any permanent base in India, they cannot be charged directly. Besides, considering that these companies are anyways paying tax in their respective countries, they cannot be charged a ‘double taxation’ as per various International treaties.
Hence, in order to tax these international companies, this special equalisation levy has been imposed.
As per the Budget proposal, a new chapter would be included in the Finance Bill, as described by FM Arun Jaitley: “specified services received or receivable by a non-resident not having permanent establishment (PE) in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India”.
How Will It Impact Indian Startups?
Indian startups, especially those which are into digital space, use online advertisements to get their customer’s attention and business. Google ads and Facebook ads are the most popular and effective platforms as of now. In 2014-15, Indian advertisers spent Rs 4108 crore on Google Adwords; while Facebook attracted Rs 123 crore of advertisement business from Indian startups.
Considering that both Google and Facebook would now pay an additional tax of 6%, Indian startups would now face the heat as their advertisement cost would also increase.
Doubts are being raised that this new taxation policy has opened a new window for Income Tax department, which may soon start to tax other aspects of cross-border digtial services including the lucrative software services market.
As per experts, Indian Government made this move due to pressure from OECD and G20 countries, whom India is also a part of. In European countries, this taxation debate on international advertisement firms (read Google) has been going on since long, and India just agreed to this notion, which will no doubt harm Digital India and Startup India programs.
Indian Government’s move to tax provident funds has already ignited strong protests all over the country.
We will keep you updated as more details come in.