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Will the 'Google Tax' make digital advertising more costly?

03-March-2016
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Will the 'Google Tax' make digital advertising more costly?

As part of the budget proposals, the finance minister has proposed an equalisation levy. The tax at 6 per cent of the consideration will apply on services relating to online advertisement. Basically, it is the government's way of indirectly taxing non-Indian platforms like Facebook, Twitter, Google, etc. 

Informally known as the 'Google tax', it is the result of a prolonged conflict between the Organization for Economic Cooperation and Development (OECD), an European think tank and the G20 group of nations of which India is a member. The equalisation levy was brought into being to combat cases of corporates using tax havens to weasel out of paying taxes. 

As consultancy firm EY notes, "This is the first significant step taken by India in respect of taxing digital economy transactions."

Rakesh Jariwala, Tax Partner (Media and Entertainment) of EY further explains, "The equalisation levy will apply on services relating to online advertisement, provisions on online ad space or other facility or services for the purpose of 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 prior to making the payment."

Shefali Goradia, Partner at BMR & Associates LLP said this would not apply for companies having a permanent establishment in India.

What this means is that we could see digital advertising become more expensive by 6 per cent on popular platforms like Twitter, Facebook, Yahoo, Google, Microsoft, etc. 

When we asked Goradia about her opinion on the likely impact, she agreed that it was a surprising move by the Indian government, given that OECD, itself, had withdrawn the suggestion of this kind of tax and considering that no other country has implemented this tax so far. "There were doubts raised about whether the companies would get tax credits in their home countries if there had to pay this tax in another country or whether they would get double taxed. This will depend on tax treaties that India has with the other countries. We will have to see," she said. 

Vivek Bhargava, CEO of iProspect India also agreed that since it would be for those companies not having a registered office in India and might lead to the more non-Indian companies opening registered offices here. He agreed that digital ad spends would become that much more expensive but did not see any advertisers shying from making that extra payment. "What I think is that maybe people will start shifting budgets from other mediums to digital to make up for that 6 per cent increase," he said.

Over here, it should be noted that the 6 per cent tax only comes to play for transactions above Rs 1 lakh per annum.

Goradia also opined that the likes of Facebook, Twitter and Google would be severely affected considering they work on low margins. "If they do not get a tax credit back in their home country, we might see this getting passed on to the end consumer," she said.

“The latest move doesn’t come as a surprise at a time when online advertising is exploding in the Indian market. This shift will lead to a large impact on business done especially with platforms such as Google, Facebook, Yahoo since they earn huge ad revenues from business entities in India. The 6 per cent however eats into the media budgets that marketers allocate to increase outreach for their business, directly impacting their overall budgets. Startups or smaller businesses are more inclined towards online advertising platforms as a means towards reaching out to their audiences in a cost-effective manner, and a charge of this sort certainly will reduce their budgets especially since every penny matters to them," opined Zafar Rais, CEO of MindShift Interactive, when asked about his thoughts on the likely impact.

"The impact of this levy will be that firstly, the income of foreign websites/ apps will now be liable to this tax. The taxes are levied under separate code and service providers may not able claim credit for the same in their home country. Additionally, there may be also be additional scrutiny on such transactions under Income-tax law,” further added Jariwala.

Nilotpal Chakravarti, Associate Vice President, IAMAI said, "We are looking into the impact with our member companies, prima facie looks like an imposition on overseas companies. " Twitter declined to comment while Facebook did not reply to our email. 

The head of a digital ad tech firm said the Finance Minister's announcement has still to be analyzed properly before coming to any inclusion.

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