India's 'Google tax' to hit advertisers and start-ups the worst
The Indian government announced in the February budget that it is imposing a 6% equalisation tax on those companies that pay more than Rs 1 lakh (approximately £1,000) a year to a non-resident companies for online advertisements. However, the Internet and Mobile Association of India (IAMAI) believes that it is actually advertisers, start-ups and SMEs that will be hit hardest, as the tax burden is likely to be passed on to them from the dominant online advertisement players like Facebook and Google, despite the policy aimed at raising revenue from them. India's advertising industry is expected to be worth over $60bn by 2020. 

It’s been dubbed the Google tax, but it will likely hit every global internet company operating in India—and, in turn, the country’s fledgling startup and digital advertising ecosystems.

From June 1, any Indian establishment that pays more than Rs1 lakh a year to a non-resident company for online advertisements—including the likes of Google, Facebook, and Twitter—will have to shell out a 6% equalisation tax. That’s because the Indian government believes it is losing significant revenue from these online behemoths, many of which are registered in countries with low tax rates.

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The rule was announced by India’s finance minister Arun Jaitley in his budget speech (pdf) in February this year:

In order to tap tax on income accruing to foreign e-commerce companies from India, it is proposed that a person making payment to a nonresident, who does not have a permanent establishment, exceeding in aggregate Rs1 lakh in a year, as consideration for online advertisement, will withhold tax at 6% of gross amount paid, as Equalization levy. The levy will only apply to B2B transactions.

Although targeted at internet companies, it is actually advertisers, including startups and small and medium enterprises, that may eventually have to pay the price. Here’s an explanation put out by the Internet and Mobile Association of India (IAMAI) in April this year:

The tech start-ups are already paying 14.5% service tax to use these ad platforms, which amounts to an estimated Rs906 crores of taxes to the government. With the implementation of GST, the tax rate is likely to move to 18% bringing more taxes to the government from this segment. Considering that the incidence of 6% levy will be passed on to the advertisers by the ad platforms, the total burden to SMEs and tech start-ups on account of Equalization Levy would be an additional burden of Rs429 crores, a massive hike of nearly 50%. This is raise the cost of operations substantially.

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According to the new rules, advertisers will have to deduct and deposit the levy with the government. That’s because the Indian arms of these online platforms don’t always receive the payment, which goes to the firms registered abroad. “The clients will have to pay the levy in short time till these firms set up shop in the country,” CVL Srinivas, chief executive (South Asia), at media buying agency GroupM told the Mint newspaper.

But the big question is whether these online platforms will absorb the cost of this additional levy, or pass it on to the advertisers.

“It is clear that the government wants the tax, now it is between the agency, the digital publisher and the client to decide who is to pay,” Sam Balsara, chairman and managing director at media buying company Madison World, said. Balsara feels that since the tax is in lieu of income, the digital publisher should be liable to pay it.

That, however, may not happen. ”This may impact small and medium enterprises because of the dominance Google and Facebook in the online advertisement space. They may pass on the burden of this tax to people using their advertising services,” Amit Maheshwari, managing partner at Ashok Maheshwary & Associates told NDTV.

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India’s digital advertising industry is currently worth $1 billion and is expected to grow by over 47% this year, according to some estimates. By 2020, this industry would be well over $60 billion. Clearly, there are great expectations of growth, but what’s unclear is who exactly will profit from it.