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Taxman pops up on online ads

Foreign digital companies such as Google, Facebook and Twitter will now have to pay a 6 per cent tax on their income from online advertisements in India. Finance Minister Arun Jaitley has announced a new tax called ‘Equalisation Levy’ on the digital or e-commerce companies that are earning revenues on B2B transactions within the country but do not have a permanent establishment in it. At present, the government doesn’t charge any tax from them.

The Government feels that with the expansion of information and communication technology, the supply and procurement of digital goods and services have expanded exponentially in India, at 10 per cent annually, significantly faster than the global economy as a whole. However, there are certain challenges in taxing these digital businesses as the transactions don’t operate in any physical location but instead take place in the nebulous world of “cyberspace”, and hence there is the difficulty of locating the transaction and identifying the taxpayer.

While tax experts feel that it is a global issue, and several countries are still wondering how to tax these transactions, India is among the few to have gone ahead. The France-headquartered Organisation for Economic Cooperation and Development (OECD) has recommended, in Base Erosion and Profit Shifting (BEPS) project, several options to tackle these direct tax challenges, including modifying the existing Permanent Establishment (PE) rule to specify that where an enterprise engaged in fully de-materialised digital activities would constitute a PE if it maintained a significant digital presence in another country’s economy.

While the Indian government has at this moment levied tax on the revenues from online advertisements, it is not clear if that would extend to other physical goods and services, said Rakesh Jariwala, Partner and Head – M&E Tax Advisory at E&Y India.

The government also recommended a final withholding tax on certain payments for digital goods or services provided by a foreign e-commerce company, or imposition of an equalisation levy on the consideration received for certain digital transactions by a non-resident from a resident or from a non-resident having permanent establishment in another contracting state.

Jariwala said, “As part of the budget proposals, India has levied an equalisation levy — what is known as ‘google tax’ globally.

The tax at 6 per cent of the consideration will apply on services relating to online advertisement, provisions on online ad space or other facility, or services for online advertisement, when such services are provided by a non-resident to either an Indian resident or a non-resident having a permanent establishment in India.

The payer for these services is required to deduct 6 per cent before making the payment. This is the first time that online services are being taxed in India.”

Arun Chhabra of Grant Thornton said the equalisation levy will earn good revenues for the government as digital transactions are growing rapidly.

This article appeared in The Hindu Business Line on 01st March, 2016.