In Budget, 2016, the government had proposed imposing an additional tax called ‘Equalization Levy’, more commonly known as ‘Google Tax’ on specified services covered by the levy and consisting of online advertising, provision for digital advertising space and any other service to be notified by government. The rules have now been notified and come into effect from June 1, 2016. This mainly covers payments made by Indian businesses to Google, Facebook and other social networking sites outside India.  

 

The Finance minister had announced the equalization levy, originating out of OECD’s Base Erosion and Profit Sharing project, on payments made by businesses for specific digital services to a non-resident entity not having permanent establishment in India.  The idea is to indirectly tax the income of internet giants for money they make from Indian advertisers, by imposing a levy on the payments these advertisers make. 

 

The Key highlights of Equalization Levy are as follows:  

• The levy extends to whole of India except the state of Jammu and Kashmir.
• The equalisation levy shall be deducted at the rate of 6% for any payment being made to Non resident (who does not have permanent establishment in India) for specified services received or receivable by a person being resident carrying on business or profession in India.
• Specified services means online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement. More services may be notified in times to come. 
• There is a relief for small businesses in India, as the levy is deductible only when the total payment in a financial year to a Non-Resident exceeds Rs. 100000
• It shall be deducted from the amount paid or payable to Non Resident and shall be paid to the credit of Central Government within seventh day of the subsequent month.
• The interest on delayed payment shall be chargeable at the rate of 1% simple interest for every month or part of the month by which such crediting of tax or part thereof has been delayed.
• A penalty for non-payment of equalization levy shall be Rs.1000 per day during which such failure continues from the due date of payment. However the total amount of penalty shall not exceed the amount of levy.
• The Annual Return in Form 1 in respect of all the specified services being chargeable to Equalisation levy shall be filed within 30^thJune immediately following the respective financial year.
• Non filing of Annual Return shall attract penalty of Rs.100 for each day during which such failure continues.
• A person shall be punishable with imprisonment for a term which may extend to three years and with fine if he makes a false statement or delivers an account or statement which in his knowledge is false.
• If a person fails to deduct this tax then he won’t be allowed to consider these payments as expenses in calculating taxable profits.
• It is worth noting that this levy has nothing to do with the service tax under reverse charge payable by Indian Business to Non-Residents. Hence, if the Non-Resident does not allow the Indian business to deduct this levy from the payments, the Indian business will have to bear the additional cost out of its own pocket. Further, there is no credit available for this levy. It will directly raise the advertisement cost by 6% if the recipient does not allow deduction.

The Idea of this levy is to indirectly tax the income of internet giant who are not paying taxes in India and at times are not paying taxes anywhere, because of their setups in tax havens. Equalization levy made various players take notice, since this is India’s first step to tax digital economy, and one of the first few internationally.

However, increasing the advertisement and compliance cost of Indian Businesses at a time when the Government is promoting ‘Digital India’ initiative with such pomp and show, is something which is contrary and tough to digest.  The big question remains. Will India become ‘Digital India’ with these steps?

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