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Who is to foot ‘Google Tax’: Internet cos or Indian advertisers?

Starting tomorrow, get ready to pay more taxes for a meal at a restaurant or a favourite car. The new tax levies proposed in the Budget will come into effect from the June 1. Included in the list is the new equalization tax, popularly called the ‘Google Tax’. This is an indirect attempt to tax money made by internet giants (like Google, Facebook, Twitter and other sites) through Indian advertisers.

Speaking to CNBC-TV18, Ketan Dalal, Senior Tax Partner at PwC, said this comes as part of a larger scheme, where these multi-national companies (MNCs) are seen to be avoiding tax in every jurisdiction.

Dalal believes that in reality, these internet giants will end up hiking the cost of advertising, which will eventually be borne by the Indian advertisers. Moreover, it will in turn hurt the ease-of-doing business concept.

In addition, the tax is a negative for the MNCs given the fact that they won’t get any credit in their home country, he added.

Though this equalization tax is only based on business-to-business model, it may percolate in a cascading effect if not directly to individual consumers, Dalal said.

Below is the transcript of Ketan Dalal\’s interview with CNBC-TV18\’s Surabhi Upadhyay and Ronojoy Banerjee.

Surabhi: Let’s get first thing right first. Right now it’s only a business-to-business (B2B) tax, so I as a user need not worry. I believe this is all part of the base erosion and profit shifting (BEPS) framework to make sure that companies are not coming up with structures to evade or avoid tax. What happens now and the first question is really who pays the tax its whole objective is that giants like Facebook and Google pay up, but will they up as one of the questions pointed out you could simply pass it on?

A: There are two or three points here as you mentioned. See this is a part of a larger global sort of theme where the thought process is that are these MNCs actually avoiding tax in every jurisdiction, but the way this particular tax which you call the “Google Tax” and which I call the equalisation levy which is technically the correct word, the way it is framed is that it will be 6 percent on online advertising and other specified services, of course nothing prevent the government for adding and in fact there was an e-commerce report on taxing of digital transaction which actually list out 13 items on which it could be levied.

To your question of who will end up bearing, well on the face of it, it’s a 6 percent withholding. If I advertise on Google or Facebook I am suppose to deduct. In reality, I suspect what will happen is they will end up hiking the cost of advertising, so whether you call it ease of doing business or cost of doing business. I ultimately thing that the Indian advertiser will wind up bearing that tax and remember there is a 15 percent reverse service charge on that as well. Of course, you can get the service charge set off against the output services, but supposed you don’t have that then of course it is a disaster.

Ronojoy: The question that many are now asking is the fact that you also mentioned that how the advertising cost will go up and many are also construing this as perhaps being anti-small business. Short while ago the Internet and Mobile Association of India actually came out with a press statement saying that if the government were to go ahead with this equalisation levy it could cripple the industry. So, is it a fair concern that is being voiced by some?

A: I am not sure about the cripple part but certainly as I was mentioning the impact is going to be quite substantial. Before coming here I was just having a very quick look at some statistics and I was amazed that global internet advertising numbers are USD 135 billion. I understand they are global not Indian numbers but this will just give an order or magnitude of what we are talking about. One of the report says that by 2020, 25 percent of global trade will become digital. So, we are talking about very substantial numbers here.

Keeping that in mind and as I said the cost in many cases is likely to be picked up in terms of the foreign party hiking its rate, it could have a significant impact.

Let us assume for a minute that it is not picked up. So, the assumption for 6 percent levy is that you are making the foreign companies – Google or Facebook or whichever is making 20 percent profits because 6 percent comes to 34 percent tax on that or 33 percent tax on that.

We all know that Amazon for example took over 10-15 years to make the first dollar it made of profit and even now it is not all that profitable considering the humongous size that it has it in terms of sales. So, I think the impact is going to be very significant which I think is the least I think will happen.