What is Google Tax or Equalization Levy?

The term “Equalization Levy” colloquially called “Google Tax” had made its first appearance in this year’s budget documents. The Government has put a 6% equalization levy on the income accrued to a foreign E-commerce company which is not a resident of India. This would affect Google, Amazon, Facebook etc.

Defining Equalization Treaty

Any person or entity which makes a payment exceeding Rs 1 lakh in a financial year to a non-resident technology company for some B2B {Business to Business Services} needs to withhold 6% tax on the gross amount being paid as an equalisation levy. The conditions for this tax are as follows:

• This tax is applicable to B2B services and goods only and NOT on B2C {Business to Consumer} goods and services.
• The tax is applicable to only those companies which have no permanent establishment in India.
• The tax has to be withheld by the buyer and deposited by him to the government.

It is a tax to equalize the tax burden on remote and domestic suppliers of similar goods and services. The objective of this tax is to make sure that those entities making a payment to a non resident for specified services like online advertisements to deduct this tax before making the payment.

On whom the equalization levy is levied?

The levy will be applicable on the payments received or receivable by a nonresident service provider not having a permanent establishment (PE) in India from an Indian resident or an Indian PE of a nonresident with respect to the specified services offered. The levy would not be applicable to nonresident service providers having a PE in India.

What are the services covered at present?

Specified services covered at present include:

• Online advertisements
• Any provision for digital advertising space or any facility or service for the purpose of online advertisement
• Any other service which may be notified by the government.

So the scope may be expanded to include other digital goods and services. The services which may be covered in the future include downloading of songs, movies and books; Software downloads; Online consumption of news and Online sale of goods and services etc.

What is the rationale behind equalization levy?

• Role of international organizations/forums: The idea of an equalization levy comes from Action 1 of the Organisation for Economic Cooperation and Development’s (OECD’s) base erosion and profit shifting (BEPS) Action Plan. The action plan considers equalization levy as an option to tax digital transactions.
• Prevents shifting of profits: The levy will prevent the technology companies from shifting profits offshore to tax havens. The levy will be against the base erosion and profit shifting and will prevent shifting of profits from the high tax-rate countries to lower tax-rate jurisdictions. Of late, the levy has become an attractive tool for governments around the world.
• To ensure tax payment by online companies: To make sure the global online businesses are taxed for the considerable income they earn from India. For example, Google earned a revenue of Rs. 4108 crore in 2014-15 as per its disclosure. Goldman Sachs has estimated the e-commerce market to grow to $300 billion by 2030 from the current $20 billion. According to the budget, digital economy in India is growing at 10% per year which is faster than the global economy as a whole. So, taxing the technology companies could earn sufficient revenue.
• To make companies to have permanent establishment in India: The levy will act as an incentive for the companies to have permanent establishments in India and to get taxed only on their net income made here. It will also discourage the practice of avoiding taxes by exploiting weaknesses in the international taxation rules.

Why online companies oppose?

• They say that a new levy will raise the cost of a whole range of services which are provided online. Ultimately, the customer will be made to pay as the companies may pass down the tax burden on to the customers.
• The levy will undermine the Digital India and Startup India programmes by discouraging innovation. Moreover, it may force the startups to cut down on advertising.
• NASSCOM has said that there exists already a tax which is being deducted at source when there is a B2B transaction. So the equalization levy will lead to double taxation of same income.
• The levy is introduced in the Budget as part of the finance bill and not as a part of Income Tax Act. So, because of this the companies would not be able to take the benefit of tax treaties to avoid double taxation in their home countries.

What has been done in the UK?

The issue of taxing companies like Google has embroiled into controversy in many countries. One such controversy erupted in UK. Search giant Google paid UK a negligible amount as tax by completing its transactions in Dublin (capital of Ireland) instead of UK, even though it earned revenue of $6.5 billion in UK. Recently, the company had agreed to pay $185 million in back taxes to the UK.

What would be the challenges faced while implementing?

With the evolution of new business models, there are difficulties in characterizing the nature of payment, establishing a taxing jurisdiction, locating the transaction, identifying the taxpayer etc.