India's new e-service tax a headache for content providers, a moneyspinner for Modi govt

hiddenNov 14, 2016 12:26:59 IST

Narayanan Madhavan

While the nation is tying itself in knots over Prime Minister Narendra Modi's demonetisation drive to trap black money, there is a flurry in India's e-commerce industry, with a new move that smacks of a potentially huge taxation opportunity for the government — and one that could unsettle giants like Amazon or local content players such as Hungama.com. 

A clutch of notifications issued by the Central Board of Excise and Customs earlier this month, and taking effect from December 1,  will make consumers pay a 15% service tax on software applications, e-books, music, movies, games or any such downloaded content, if the supplier is overseas.  The details are explained here.

Picture it like a customs duty, though it is called a service tax because the tax applies on import of content. So far, only business-to-business (B2B) deals involving overseas suppliers were subject to such a levy, with some exemptions for databases. Now it also affects consumer downloads.

Consider two facts. One, India's smartphone penetration at around 30% of one billion mobile phone users implies a potential taxpayer base of 300 million people for the Modi government. Secondly, the game is shifting worldwide to "all you can eat" membership services based on monthly or annual subscriptions to streaming services from companies or brands such as Apple, Gaana.com, Hungama, Wynk and Amazon, and this means the government could get a cut every month from every consumer who subscribes to any of the services, be it for music, movies or e-books.

Notably, the tax will also cover cloud storage in addition to content. This is a a huge long-term taxation opportunity for the Modi government because everytime anyone with a Gmail account buys storage (actually it is a monthly rental), the buyer pays a monthly extra charge to Google to be passed on to the government.

However, does the new service tax put domestic suppliers (say, a Flipkart e-book service competing with an Amazon Kindle Unlimited) at an advantage? It seems not because movie downloads at home already have this tax and hence the intent seems to give a level playing field to all content service providers.

The new service tax is in addition to India's own "Google Tax" imposed last June when the government gave effect to a budget announcement  or 6 per cent "equalisation levy"  on online advertising and other notified services, taking a cue from the club of the developed economies, the Organisation of Economic Cooperation and Development (OECD).

The OECD came up with its BEPS — or Base Erosion and Profit Sharing — project that helped nations plug tax avoidance steps that exploit gaps in tax rules between countries. You can call it tax arbitrage, like buying a car in a neighbouring state in the days of the sales tax that is now being replaced by the goods and services tax (GST).

But the the key point is that in India's new service tax case seems more to check an anamoly between domestic and overseas content suppliers and also create a new avenue for revenue in addition to a levy to crack down on tax avoidance.

Companies such as Amazon, Google and Facebook are affected by both the new service tax and the old equalisation levy but questions have been raised on what happens to the levy with the new service tax in place.

With consumers being at the receiving end of the new service tax there are niggling questions on what happens to tourists and other travellers in India who download content from overseas.

The game is complicated because in a connected world in which storage, content and various service providers work as teams or partners over bandwidth, the old-fashioned logic of treating digital content akin to manufactured products may be negatively disruptive. With piracy a key problem and copyright not honoured enough, will this dissuade consumers from downloading content?

At first look, it seems so. However, since streaming services often involve affordable  rates for consumers, the taxman may laugh all the way to the bank from electronically levied high-volume services after having had his fill from demonetisation.

One key change with effect from December is that downloads done in India will be subject to the service tax, irrespective of the location of the service provider. This means if you download a Kindle book from Amazon sitting in India, Amazon will have to collect the tax from you and pay it to the government, for which it needs to set up the infrastructure or other arrangements. This is because the onus of levying the tax is now on the service provider.

The writer is a senior editor and journalist who has worked for Reuters, The Economic Times, Hindustan Times and Reuters. He tweets as @madversity