he government’s decision to levy an equalisation tax of 6 per cent on online advertisement services offered in the country by non-resident entities will impact users, especially start-ups that rely almost entirely on the online world to popularize their services.
Further, as the levy is not introduced as part of the Income Tax Act but as a separate legislation under the Finance Bill, global firms that offer such services in India cannot claim a tax credit in their home country under the double taxation avoidance agreements, experts point out.
“The move may impact Indian businesses (that buy online advertisement space),” said Jiger Saiya, Partner, Direct Tax, BDO India. “In the absence of ability to claim credit, the non-resident service provider offering such online advertisement services may not absorb such deduction thus adding to the cost of the end-user here.” Agreeing, Amarjeet Singh, Partner - Tax, KPMG in India, said, “Service providers may ask Indian firms to gross up the levy, adding to the cost of business, which would hurt many start-ups and medium-sized businesses using the service.”
India is among the top five markets for global Internet firms like Google, Facebook, Amazon and Twitter, among others.
“Indian businesses use global advertising platforms extensively to reach out to their customers in India and overseas,” Mr.Singh said. “Over the years, owners of global platforms have been invoicing such services through foreign units in low-tax countries.”
The issue of Internet firms not paying enough taxes in places where they generate profits, by shifting them to tax havens, has been debated across the globe. The Organization for Economic Cooperation and Development (OECD) under the authority of Group of 20 countries has mulled ways to revise tax treaties, tighten rules and to share more government tax information under a project called Base Erosion and Profit Shifting (BEPS). The OECD had issued action plans last year and one of the areas discussed was on addressing tax challenges in the digital economy. With the 6 per cent equalisation levy, India becomes the first country to propose a levy on digital economy, according to tax experts.Permanent establishment
“In order to tap tax on income accruing to foreign e-commerce companies from India it is proposed that a person making a payment to a non-resident (global advertising platform), who does not have a permanent establishment, exceeding in aggregate Rs.1 lakh in a year, as consideration for online advertisement, will withhold tax at 6 per cent of gross amount paid, as equalisation levy,” Finance Minister Arun Jaitley said in his recent budget speech.
The equalisation levy looks at taxing online advertisements, provision of digital advertising space or any other facility or service for the purpose of online advertisements, according to a note from EY.
Here’s how it works: if an Indian entity, bound by contract to a foreign parent, pays the latter say, Rs.20 lakh for online advertisement inventory, it would now have to withhold a 6 per cent levy and pay the foreign firm Rs.18.8 lakh. The balance Rs.1.2 lakh goes to the Indian government.
“If an Indian arm of the foreign entity procures advertisement inventory from the latter, this tax is applicable,” Rakesh Jariwala, Partner - Tax & Advisory Services, E&Y said.Business collection
“The Indian arm, when reselling the advertisement inventory to Indian users, may choose to pass on the levy cost. If the Indian arm owns the entire inventory and there is no remittance to the foreign parent, then this levy is not applicable.”
The collection from the levy would be currently small as the online advertisement business is about $1 billion in India and foreign firms’ advertisement inventory here makes up about 60-70 per cent of the market, Mr. Jariwala observed. “So 6 per cent of that is only between $36—$42 million. While the tax rate may not increase, the ambit of services provided will increase.”
The tax would come as ablow for both Indian firms that use the service and those that provide the service.
“The onus of deducting the equalisation levy lies with the Indian payer with business income (or permanent establishment of a non-resident). So if the said payer is a user of the online advertisement platform of a non-resident paying over Rs. 1 lakh for the same, he would need to withhold 6 per cent from such payment, pay the same to the government and remit the balance to the non-resident service provider,” Mr. Saiya said.
“Failure to do so has penal consequences. In case the Indian payer fails to pay to the government, he would not be allowed to deduct this expenditure while computing his taxable profits.”