The Digital Space has grown very rapidly in the past few years and is expected to grow substantially in the next few years. The biggest beneficiaries of this rapid growth in the Digital Space are companies earning through Digital Ads like Google, Facebook, Twitter, Linkedin, Yahoo and other advertising majors.
Moreover, as these companies are located outside India, they are not even subject to any taxes in India. Business in the Digital Domain is done irrespective of the physical location of the service provider/recipient and is being done in the nebulous world of cyberspace. Persons carrying business in digital domain could be located anywhere in the world.
These new business models have created new tax challenges. The digital business fundamentally challenges the current manner of levy of taxes which are based on the presence-based permanent establishment rules.
Introduction of Equalisation Levy @ 6% on Digital Ads
Many Internet Companies are generating massive revenues from India. However, as they don’t have a permanent establishment in India – they are not liable to pay to any income tax in India. The Budget 2016 has put an end to this free run for such internet companies and has proposed to introduce an “equalization levy” @ 6% on specified services which are availed by Indian Residents from Non Resident providers.
This Equalisation Levy of 6% is proposed to be levied on specified services by Internet companies. The only specified service mentioned as of now is Advertisement, any provision for digital advertising space, or any other facility or service for online advertisements.
With the introduction of the Equalisation Levy, the Govt has been indirectly able to tax the Global Advertising Companies. More such services may be added in the list of specified services in future. Currently this Equalisation Levy would only be on Advertisements.
Applicability and Manner of Deduction of Equalisation Levy
The Equalisation Levy would only be applicable if the aggregate amount of consideration for specified services (Ads) exceeds Rs. 1 Lakh during the year. This limit of Rs. 1 Lakh has been introduced to reduce the burden of small players in the digital domain. If the aggregate payment made or expected to be made during the financial year is less than Rs. 1 Lakh – Equalisation levy won’t be applicable in this case.
This levy of Equalisation would be in the same manner as TDS i.e. the person making the payment for Digital Advertisements would be required to deduct Equalisation Levy @ 6% of the Total Payment and deposit the same with the Central Govt.
In case of any failure in complying with the provisions of the Equalisation Levy, the amount paid for such services won’t be allowed to be claimed as an expense for income tax purposes.
Exemption from Equalisation Levy
Equalisation Levy would not be applicable in the following cases:-
- If the Payment made during the year is less than Rs. 1 Lakhs
- If the organisation making the payment is registered in Jammu & Kashmir
Reason for Introduction of Equalisation Levy
Many companies which are providing services in the cyberspace register themselves in a country wherein the tax rates are low and pay very low taxes on their global income. The issue of taxing the income of these Global Advertising Giants has been on the minds of tax authorities of several countries.
In a recent case held in the UK – it was held that by registering itself in Dublin instead of UK, Google was paying negligible amount of tax. Google lost the case and had to pay $ 185 Milllion in taxes to the UK Govt.
If we talk about India – The revenue of Google was Rs. 4108 Crore in 2014-15 and the revenue of Facebook was Rs. 123.5 Crores during the same period. Introduction of Equalisation Levy would fetch the govt a lot of money which till now was not taxed. Many people are also referring to this Equalisation Levy as Google Tax because a major chunk of online ads spent goes to Google.
Annual Return and Deposit of Equalisation Levy with the Govt.
The Equalisation Levy which is to be deducted @6% is required to be deposited with the Govt. within 7 days from the end of the month in which this amount has been deducted. For example: If Equalisation Levy has been deducted in the month of Sept, it is required to be deposited with the Govt on or before 7th Oct.
Challan No./ ITNS 285 is required to be deposited along with the Payment of Equalisation Levy. Equalisation Levy can be deposited online with the govt through the following link:-
An Annual Return is required to be filed with the Govt stating the Equalisation Levy withheld and the organisations to which the payment has been made. This return is required to be filed annually and is to be filed in Form No. 1 on or before 30th June of the next financial year. This annual return is to be verified either through Digital Signature or through an Electronic Verification Code by an authorised signatory.
Clarification from Google regarding Equalisation Levy
I tried reaching out to Google to understand how equalisation levy will work on the payments made to them and here is the response I received:-
Google responded that Yes, Equalisation Levy is applicable.
However, they also mentioned that as per the Terms and Conditions mentioned in Google Adwords, the advertiser has to bear any tax or govt charges on the services availed by them. Therefore, the advertiser will have to pay 6% Tax himself and deposit the same with the Govt.
Here is a screenshot of the response I’ve received from Google
A friend of mine also sent the same mail to Google asking for clarification and he received the mail stating that Equalisation Levy is not applicable.
Authors Take on Levy of Equalisation Levy on Google
Google has given different opinion on 2 different categories of advertisers. In the first case, they said that Equalisation Levy is applicable. Please also note that in the 1st Case, the Google Address mentioned is not of India. As in the 1st case, the company to whom the payment is being made is outside India – therefore Equalisation Levy @6% would be applicable.
However in the 2nd case, Google said that Equalisation Levy is not applicable. Please note that in the 2nd case – the address mentioned is of Bangalore and therefore as the company is based in India – Equalisation Levy @6% would not be applicable. In this case, Service Tax @15% would be applicable as the company is based in India.
|If Service Provider* based outside India||Equalisation Levy applicable @6%
Service Tax not applicable
|If Service Provider* based in India||Service Tax applicable @15%
Equalisation Levy not applicable
*Service Provider in the above table refers to Google, Facebook, Linkedin, Yahoo etc