Govt to introduce 6% equalisation levy on digital advertising

In a move that could be seen as a way to tax large companies such as Google and Facebook, the government had proposed in Budget 2016 the decision of introduce an equalisation levy.

This would mean a deduction of 6% to be made by an Indian payer on payments to a non-resident entity for specified B2B services such as advertising, according to a report by a leading daily.

The move is expected to impact the bottom-lines of giants such as Google, Facebook, Yahoo and others which earn ad revenues from business entities in India.

The decision is also expected to many digital services that could be brought under it. Many e-commerce companies and start-ups that rely heavily on digital advertising are expected to be also hit due to this decision.

An equalisation levy of 6% will have to be deducted for the company which makes payments exceeding Rs 1 lakh in the aggregate in a financial year to a non-resident service provider for its services, said the report.

The services specified includes online advertisements, provision for digital advertising space or any other facility or service for the purpose of online advertisements.

However, there are fears that the government could widen the scope of the levy and could give powers to the government to expand its definition on the specified services.

The Budget has also proposed that the Indian companies who do not deduct equalisation levy against payments made by them and do not deposit it with the government will be disallowed such expenditure from computing taxable profits, said the report.

This means that the taxable income will be higher by the amount of disallowed expenditure, which means a higher tax payable.

The issue of taxing companies such as Google has come as many countries the world over have been troubled over it. In the UK the controversy had erupted over Google's non-payment of tax. Recently, Google had agreed to pay $185 million (Rs 1,253.3 crore) in back taxes to the UK government.

It completed its transaction in the Dublin, the capital of Ireland and paid a negligible amount as taxes.

At the heart of issue is that multi-national digital platforms do not have 'permanent establishments' in the country which would make them pay taxes in India. However, they cannot be double-taxed, which means that the government has had to find ways to earn something the profits made by them, the report added.

The Organisation for Economic Co-operation and Development (OECD) and G20 countries have tried to introduce measures to ensure tax transparency and curb avoidance by multi-national (MNCs) through aggressive tax planning.