The equalization levy of 6% on consideration for specified services from non-residents not having a permanent establishment in India is a brilliant move by the Finance Minister in his budget 2017. Non-residents are a difficult category to tax thanks to the distance and different country they operate from. The advent of ecommerce and its growth at an inexorable speed of 10% every year has added a new dimension to the problem.
At a time when the countries of the world were flummoxed by this seemingly intractable problem, the OECD through its Base Erosion and Profit Shifting (BEPS) neutralization initiative has authorized members to lay its hands on transactions taking place in the nebulous and virtual world of internet through identification of servers and websites catering to the non-residents. To wit, if Google earns sizeable advertising revenue from India thanks to its Indian server or thanks to the advertisements being inserted in its website by the Indian websites with residence in India, then the Indian government gets the legitimacy to tax it pro tanto.
Jaitley must be complimented for seizing the moment. The ink on the OECD document on BEPS had not even dried, as it were, when the Indian Finance Minister Arun Jaitley, prised open this opportunity and thus enabled India to blaze the trail on this issue when all along it has had the dubious reputation of being a me-too and stepping into the scene rather late in the day. He has through Finance Bill, 2016 levied a 6% tax called ‘equalization levy’ on consideration for specified services rendered by non-residents. The term includes advertisement revenue and other revenue to be specified by the central government from time to time.
The move has Google written all over it so much so that the equalization levy has earned the sobriquet Google tax though it applies to other online portals like Yahoo etc as well. The only exception is in favor of Indian advertisers paying not more than Rs 1 lakh during the financial year to a non-resident. Thus if an advertiser on Google pays Rs 50 lakh during a financial year, it will have to deduct 6% i.e. Rs 3 lakh and remit only the remaining Rs 47 lakh. The Rs 3 lakh must be deposited with the central government. Does it sound like TDS? Well, yes the first impression one gets is it is indeed tax deducted at source or TDS but actually it is not because it is not being done through the income tax law but through a separate scheme under the Finance Bill 2016 with its own minutiae for returns, appeals and adjudication.
Indeed this could be the aspect of the scheme that could stick out like a sore thumb. Non-residents would have liked to claim it as a set off against their tax liability at home but it would not be possible because the levy hasn’t been given the character of income tax. Be that as it may, Indian residents would have to fall in line because otherwise the advertisement expenses will not make the grade. In the above example, the entire Rs 50 lakh would be disallowed while computing the business income of the Indian resident it was remiss in not deducting Rs 3 lakh and depositing it with the exchequer.
Foreign companies may not take this lying down. They may repeat the age-old stratagem of putting the burden on the Indian payer. In other words, they would increase the advertising tariff to such an extent that at the end of the day they are not worse off even after this levy. This they may do explicitly or covertly.
For the dyed in the wool tax practitioners in India though there seems to be a simpler course available. After all, the Google ads leave a firm imprint as to where they are coming from. And if they are coming from Indian residents then the normal business connection rule could have been invoked that would have yielded it a crunchy and juicy 40% tax revenue.
But then the Finance Minister would have most certainly considered this course and discarded it because it is potentially disastrous, the one that would give the foreign business community a handle to beat it with. Tax tyranny would be back in currency at a time when the Indian government is smoking the peace pipe with the foreign companies in its bid to attract FDI. A modest tax that would be more readily accepted is preferable than the ambitious full income tax that invariably locks the department in an interminable battle with the resourceful foreign companies.