NEW DELHI: A government-appointed panel has recommended wide-ranging expansion of the so-called 'Google tax' that first made an appearance in the Union Budget this year, causing dismay among internet companies which believe that a new levy will raise the cost of a whole range of services provided online.
In a report unveiled on Monday, an eight-member committee on taxation of e-commerce proposed that services ranging from online advertising and cloud computing to software downloads and web hosting are subjected to an 'equalisation levy' of 6-8% of gross payment if the provider of the service is a foreign entity without a 'permanent establishment' in India.
The committee, which included representatives from the government and the industry, has said that only payments of over Rs 1 lakh be covered by this levy, which would mean that almost all transactions involving consumers will be exempt. Abudget proposal to impose an 'equalisation levy' of 6% on the fees that online advertisers pay to "foreign e-commerce companies" set the stage for this report, and a potential move to tax almost all cross-border digital transactions.
In doing so, experts said, the government is looking to tap into a rich vein of revenue and bring to heel global internet companies which it believes are avoiding taxes. The levy introduced in the budget was based on the recommendations of this committee, which was set up to identify base erosion and profit shifting (BEPS) proposal that India could roll out from the coming financial year.
"India is challenging them: If you think credit for this 6% is so important for you, and you are deriving income from India, why don't you set up a permanent establishment in India?" said Amarjeet Singh, a partner at KPMG.
The crux of the issue is that multinational companies such as Google, Facebook and Twitter — not to be confused with their Indian arms — do not have "permanent establishments" in India which would make them liable to pay tax. And they cannot also be double-taxed, which means the government has had to find a way of earning something from the profits that these platforms have been making.
The committee admitted as much in its report, saying that the equalisation levy will create incentives for such companies to establish their permanent establishments in India and get taxed only on their net income here. It is also "creating disincentives against artificial arrangements to avoid paying taxes on income arising from India by exploiting the systemic weaknesses in the existing international taxation rules," the reporting said.
Digital multinationals, for their part, argue that the "Indian establishments" that they set up here pay income tax and service tax on digital advertisements, "contrary to the underlying rationale of the equalisation levy." The levy, the multinational lobby is arguing, will undermine the Digital India and Startup India programmes by discouraging innovation and forcing startups to cut down on advertising.
Google, Facebook, Twitter and Amazon did not immediately respond to requests for comment. Dubbed the 'Google Tax' in the UK after a provision which aims to prevent technology companies from shifting profits offshore to tax havens, the levy is becoming an attractive tool for governments around the world.
The issue of taxing companies such as Google has been vexing tax authorities in several countries, and recently erupted into a controversy in the UK. By completing its transaction in the Irish capital Dublin instead of in the UK, Google was paying negligible amount as tax in a country where its revenue topped $6.5 billion.
Recently, the US-based search giant agreed to pay $185 million in back taxes to the UK. Tax experts said that the equaliastion levy is a result of co-ordination between the rich OECD countries and G20 which includes India. The "equaliastion" happens because the government is supposedly levelling the playing field and making multinational tech companies pay for the money they make in India.
Google's revenue from India was Rs 4,108 crore in 2014-15, according to disclosures by the company. Facebook's topline was Rs 123.5 crore in the same period. The Indian e-commerce market is estimated by Goldman Sachs to grow to $300 billion by 2030 from $20 billion now. Digital ad spending is projected to increase to $15 billion by fiscal 2030 from $500 million.
Rajesh H Gandhi, a partner at Deloitte Haskins & Sells, suggested that the government might prescribe a higher threshold for exempting transactions between businesses and consumers (B2C) or ask intermediaries or payment gateways to recover the levy. "It is possible that in future, equalisation levy could be charged on B2C transactions as well," he said.
Detailed guidelines are not yet out on how the new levy will be implemented but experts hope that the report will serve as a guidance. Rakesh Nangia, managing partner, Nangia & Co, was of the view that the report provides clarity that filing of return shall be mandatory only if the receipts chargeable to the levy exceed Rs 10 crore.
The committee, he said, also made it "clear as day" that the levy is out of the purview of tax treaties. The panel noted that income arising from payments subjected to the levy should not be subject to income tax. It pointed out that deduction by payment gateways and by authorized foreign exchange dealers can significantly reduce the obligations on payers, and strongly recommended that work should be initiated for exploring this possibility.
Singh of KPMG said that the levy could be open to legal challenge, and ultimately, the customer will have to pay the price. "It will flow down to the customer. None of these companies will say they will bear the cost," he said.