‘Google Tax’ detrimental to startup ecosystem

• The equalisation levy, also known as Google Tax’ which the government is imposing on online advertising revenue by non-resident e-commerce companies earned in India, is expected to adversely affect the startup ecosystem going forward.
• The levy which is at 6% presently became effective on June 1. If passed on to start-ups, the applicable tax is expected to be in excess of 22%, including the 15% service tax and could further increase if GST comes into effect.
• Besides, the fact that the levy has been notified in addition to taxes payable by a businessman on imported online services unduly increases the cost of doing business for startups which in turn stifles innovation.
• Usually, small scale technology driven companies generally do not have enough capital to engage employees inhouse for all necessary business activities. Google tax adds to this problem.
• Also, emerging startups burn a lot of cash in the first few years before becoming profitable and when the levy is expanded to include a vast number of other digital services the burden is set to multiply exponentially, hampering even more serious cost to innovation.
• So, in order to solve this problem , A cap should be placed on the rate of taxation at the very least, and the number of notified services subject to the levy should not be expanded until there is an impact study undertaken by the government.

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.
• This 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(business to business ) services from these technology companies.
• Specified services which comes under this tax includes online and digital advertising or any other services for using the digital advertising space.
• If 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.

Analysis:

• 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.
• This levy has come in for criticism from some quarters, as the foreign entity, will not get a foreign tax credit for such deduction in its home country. ALso, as tax is already deducted at source on the payments made to the foreign entity, imposition of an equalisation levy, it is viewed amounts to double taxation.
• The equalisation levy, is expected to impact the bottom lines of companies such Google, Yahoo, Facebook, Twitter and others, unless they deal with Indian business entities via their subsidiaries in India.
• This tax will impact the online start ups which are mainly dependent on facebook and google for their advertisement.
• Also the proposed ‘Equalisation levy’ is indirect, and it falls upon Indian advertisers to collect the 6% tax and deposit it with the government. Hence it is felt that the Googles and the Amazons are simply more likely to increase the price of their products or services to recoup the taxed amount. So, basically it will harm the Indian companies. 

By: Vishal