Online advertisements could get costlier with the equalisation levy (EQL) or the so-called “Google Tax” kicking in from Wednesday. Another budget proposal, the Direct Tax Dispute Resolution Scheme, which offers a window for companies to settle existing tax disputes, pending in courts and arbitration, will also come into effect from June 1.
The EQL of 6% is aimed at nullifying the advantage of foreign e-commerce firms, ‘without a physical presence in India’ over its local competitors.
Under the rules, an Indian client will have to “withhold” 6% as equalisation levy if it makes a payment of more than ` 1 lakh a year to an overseas technology company. This is done to tap a tax on foreign e-commerce companies’ incomes earned from clients in India. The EQL is currently limited to business-to-business transactions and could hurt companies such as Google and Facebook, which earn revenues from online advertisements.
“Currently in the digital domain, business may be conducted without regard to national boundaries and may dissolve the link between an income-producing activity and a specific location,” the government said in the Budget documents for 2016-17.
“These new business models have created new challenges. The direct tax issues relating to e-commerce are the difficulties of characterising the nature of payment and establishing a link between a taxable transaction, activity and a taxing jurisdiction, the difficulty of locating the transaction, and identifying the taxpayer for income tax purposes.”
Last month, the Internet and Mobile Association of India (IAMAI) had said that the levy on online advertisement revenue of foreign companies would “severely raise the cost of doing business” for Indian tech startups.
“Litigation has been a major area of concern in direct taxes,” the government said in the budget documents. The Direct Tax Dispute Resolution Scheme, 2016 is aimed at reducing the backlog of cases, and enable the government to realise its dues.