Google tax’ looms large: Marketing spend might go up

Court cases likely over interpretation of the new levy proposed in the Budget for digital economy

The government’s plan to expand the scope of equalisation levy proposed in the Union Budget, seeking to bring more transactions in the digital economy under the tax net, has left many e-commerce players fuming.

While many are still trying to understand the implications of the proposed guideline, dubbed the ‘Google tax’, some internet-led businesses have come out and said that it will impact their marketing budgets. That, in turn, could push up prices of products sold online, thereby making e-commerce less attractive without the regular discounts. Experts have also hinted at the possibility of litigations over the interpretation of how the ‘Google tax’ will be executed.

“Our cost of doing business in India just went up. An e-commerce company has to spend as much as 75 per cent of its investments on online advertisements,” said Sandeep Aggarwal, founder and chief executive of Droom.

He added the attractiveness of global social media and marketing giants such as Google, Twitter and Facebook have just gone down with this rule. “A company might just go to a smaller online marketing company, which is ready to undercut the taxes, maybe share it, which global companies might not do. This will come as a deterrent for advertising on major portals,” he added.

Although there are fears that the ambit of equalisation levy might be expanded over the years to include downloading of songs, movies and books, online consumption of news, software downloads, among other things, experts said clarity on these issues was needed before jumping to a conclusion.

“We need to go through the notification first before jumping the gun. There is a need for more clarity on a variety of issues. Also, the government is doing what is being done in many other countries,” said a senior official from industry body Nasscom.

This levy is India’s attempt to tax the digital economy in a non-adversarial manner and at the same time demonstrate its commitment to the global Base Erosion and Profit Shifting (BEPS) project and to raise more revenues for the country, said Amarjeet Singh, partner – tax at KPMG in India. “However, the manner in which the levy has been imposed might get tested in Indian courts.”

While there are fears that the brunt of the taxes would be finally borne by the end user or the consumer of these services, some e-commerce companies believe that restricting the levy to business-to-business (B2B) customers would curtail that.

“Equalisation levy is a step towards providing a level-playing field for Indian tech companies providing online services. By restricting the levy to B2B, direct consumer impact is limited. The Budget speech had spoken about online advertising services – by making the ambit broader, ambiguity is substantially lower,” said Kiran Vasireddy, senior vice-president at Paytm.

According to experts, the equalisation levy introduced by Finance Minister Arun Jaitley in the Budget is based on a considered view taken by the Committee on Taxation of E-commerce appointed by the Central Board of Direct Taxes, which consisted of members from Department of Revenue, industry representatives and select international tax experts.

“The recommendation given by the Committee was based on extensive reliance on final report (issued in September 2015) relating to Action 1 of BEPS project. The adoption of EL (equalisation levy) as a mode of taxing the digital economy in India was considered to be the simplest option as it shall entail only amendment to the domestic tax law against any other option where there was a requirement to renegotiate or amend existing DTAs (double taxation agreements). At the same time, the format of EL also ensured that the companies and payments being subjected to such levy are exempted from tax compliances in India,” said KPMG’s Singh.