The 'Google Tax' or 'Facebook Tax' which was first announced in the
FY17 budget statement by Finance Minister Arun Jaitley will be levied
from June 1. Here's all you need to know about it -- what Google Tax is,
who will pay it, and its implications --
As the name suggests, it's got something to do with e-commerce companies.
The Google Tax was announced to introduce a tax on the income as
accrue to a foreign e-commerce
company outside of India. Google Tax or
'equalisation levy' as it's called in India, is expected to impact the
bottomlines of giants like Google, Facebook, and others.
So what is this Google Tax (or Amazon or Facebook Tax)?
According
to the Budget announcement, any person or entity that makes a payment
exceeding Rs 1 lakh in a financial year to a non-resident technology
company will now need to withhold 6% tax on the gross amount being paid
as an equalisation levy. The said rule is applicable when the payment is
made to companies that don't have a permanent establishment in India.
This tax, however, is only applicable when the payment has been made to
avail certain B2B services from these technology companies.
What are the services that fall under this rule?
Specified
services include online and digital advertising or any other services
for using the digital advertising space. This list, however, may be
expanded soon.
Why has the tax been introduced?
The tax has been aimed at
technology companies that make money via online advertisements. Their
revenue is mostly routed to a tax haven country. This tax will help
bring the said companies under the tax radar in India. With this new
tax, India has also joined the list of other Organisation for Economic
Cooperation and Development (OECD) and European countries where a
similar tax is already in place.
Who will it impact?
If you're a business owner, especially
running a small business or an online start up, and you use Facebook or
Google for advertising and marketing promotions, then the Google Tax
will impact you.
Let's take an example: assume that A runs a company and is liable to pay Rs 5 lakh to a foreign company to advertise with them.
With the new tax in place, A will have to withhold 6% of the amount –
i.e. Rs 30,000 – and pay the balance Rs 4.7 lakh to the foreign company
for its services. The withheld amount will be paid to the government.
It remains to be seen whether the foreign company will stand to bear
the loss by simply accepting lower margins because of the new tax or
will they hike the advertising rate taking the new tax into account?
If the latter happens, which is most likely, the Indian business owner, in this case, A, will bear the loss.
A's overall billing will likely shoot up by about 6%, which means he
will have to pay Rs 5 lakh plus taxes. So his total payout may go up to
Rs 5.3 lakh.
What if an Indian business owner or company fails to deduct this tax?
The
Budget has proposed that any Indian business owner or company that
fails to deduct this tax or equalisation levy or doesn't deposit it with
the government, then the company will not be allowed to consider the
expenses in calculating taxable profits. This will increase the taxable
income, thereby hiking the company's tax liability.