Amidst all the hysteria over the contentious provisions (EPF Tax & 1% Excise on Jewellery) that were introduced in the Budget last month, another extremely important announcement went relatively unnoticed. This was the decision of imposing an ‘Equalization Levy’ on companies providing online advertising services to businesses, ostensibly to tap the tax avoiding tendencies of tech giants like Google, Facebook etc. In simple terms, any advertising income received by such companies would now be taxed at 6% from April 1st, 2016 i.e. the new financial year. In this post, I shall present my analysis on who exactly are the stakeholders with respect to this provision and how would they be impacted by it.
With Budget 2016, the Indian Revenue Department vowed its allegiance to the Base Erosion & Profit Shifting (BEPS) Action Plan; a series of proposals prepared by the Organisation for Economic Co-operation & Development (OECD) aimed at curbing profit shifting from high tax to low jurisdictions by multinational enterprises. Out of 15 Actions proposed, India announced three in the budget. One, the Country-by-Country (CbC) reporting structure which introduces a more robust compliance mechanism for MNE’s undertaking intra-group transactions across jurisdictions; two, the Patent Box Regime wherein income from patents developed & registered in India would be entitled to a tax benefit and three, a digital tax, so to speak, on income earned by online advertising service providers.
The third proposal presents an interesting case study. As we know, in the digital economy, establishing a strong internet presence is imperative for long term success and usually, the best way to do so is by advertising on a popular platform, thereby reaching millions of internet users. Yahoo, Google, Facebook are all examples of such platforms which provide space for online advertising. But, their global structure and until now, outdated tax legislation, has allowed them to escape taxation. The strategy is simple; the recipient of the advertising income is not the regional subsidiary that the concerned MNE may have in the jurisdiction where the payer is located (say, Google India) but usually another subsidiary located in a tax haven (say, Google Cayaman Islands). That, along with Revenue Authorities’ reluctance to include digital presence while interpreting the meaning of Permanent Establishment (PE) in litigation, has the reason behind the continued subversion of the tax process by large internet companies. In response to this, BEPS Action Plan 1: Addressing the Challenges in a Digital Economy, the OECD has proposed either expanding the definition of PE to include digital presence or imposing an equalization levy on certain transactions, the latter being christened as ‘Google Tax’ by commentators in Britain which became the first country to introduce such a provision.
Out of the two options, India made the right choice by adopting the latter. This is because a flat-out tax would certainly be better administered than a broader PE definition since that might increase the risk of arbitration, thereby going against the PM Modi’s promise of ‘ease of doing business’. Also, the provision is introduced as a separate chapter in the Finance Bill and not as part of the Income Tax Act, the companies receiving such income would not be liable to file the complicated Income Tax Return (a separate return would be filled), thus making life a wee bit easier for the companies in question. Of course, the flip side to that is the non-availability of tax credit for the amount payed to the Indian exchequer and the government has made a wise move by keeping the rate at a low 6% so as to not frustrate the companies too much. Finally, limiting the levy to B2B transactions as well as imposing the annual monetary limit of INR 100,000 is indeed a step in the right direction thereby sparing small businesses from an additional compliance burden.
One can argue that such a legislation would hurt new businesses the most, who might find themselves being coerced by these large MNE’s to pay the taxes over and above the advertising bill. Thus, to that extent it goes against the spirit of the ‘Start Up India’ scheme launched by the Prime Minister a few months back.
But that being said, this is a crucial provision in terms of minimizing tax avoidance, while at the same time providing a predictable tax regime for MNE’s operating in India. How it manifests itself is yet to be seen.