India’s `Google Tax’ Introduced from June 1, Could Backfire

India has decided to take the fight to the mighty while governments around the world are shocked how little taxes multinationals pay.

From Wednesday, the Indian government would collect 6 cents out of every dollar that Indian merchants pay to advertise their wares on a foreign website such as Google, Facebook or Yahoo. The Indian media is calling it the “Google Tax” in line with the global zeitgeist, when in reality it isn’t one.

This levy which is formally known by the name of equalization levy isn’t part of the Indian tax code. However 6 percent is a big deal- whatever be its legal status.

In its latest full year 4 percent of its global revenue was paid as income tax by Alphabet, the owner of Google. The company makes rampant use of international tax-saving devices like “Double Irish” and “Double Sandwich”. For Amazon, the figure was an even more derisory 1.2 percent.

The money that Indian advertisers pay websites that aren’t taxable entities in India, need to withhold the levy from the payment and hand it over to the government starting June 1. Which party holds the upper hand in their dealings would decide whether the merchants will be able to deduct the amount from what they’re billed, or whether websites will simply jack up their rates.

India’s fast-growing online advertising market have the greatest influence of Google and Facebook.

Indian merchants don’t really have homegrown alternatives when it comes to Google and Facebook. Hence it can be safely assumed that the levy will simply get passed on to customers.

Countries where the online ad revenue is being booked would have to grant offsets on the amounts paid in India if the levy had been introduced as a tax. The final increase in the price paid by the Indian advertiser would be less than 6 percent as those savings could then be shared. Whether a levy in India would be entitled to a tax offset in another country is unclear.

This has raised questions about the act by the Indian government is done to spite the face of global tax avoiders and whether India is cutting off the nose of its $1 billion digital advertising industry, estimated to grow by 47.5 percent this year.

The objective is to “tap tax on income accruing to foreign e-commerce companies from India,” the Indian finance minister has said. Hence there are assumptions that if Indian online commerce does quadruple to $60 billion by 2020, as predicted by Google and AT Kearney, the step suggests that the tool may be more widely used later.

The OECD framework on the base erosion and profit shifting and which urged countries to avoid working at cross purposes could clash with India’s homespun solution to the problem of taxing cross-border online advertising. New Delhi should either press the OECD to accept the equalization levy as a global standard, or re-introduce the measure as a tax to avoid artificially inflating the cost of doing business online, say experts.

(Adapted from Bloomberg)

Categories: Economy & Finance, Regulations & Legal, Uncategorized

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