What is Google Tax in India? A Complete Guide to Equalization Levy

Google Tax. This mysterious-sounding term has been popping up in Indian financial news lately. But what exactly is Google Tax and how could it impact businesses and digital services in India?

Introduction to Google Tax

Google Tax is the popular name for the Equalization Levy introduced in India in 2016. It is a 6% tax levied on payments made to foreign companies providing specified digital services to Indian residents or companies.

The tax is intended to level the playing field between resident e-commerce companies and foreign players like Google, Facebook, and Amazon by taxing their India-specific revenues. This helps prevent loss of taxation revenue since these global giants often use tax havens and show minimal profits in India despite significant local income.

Other names for Google Tax are:

• Facebook Tax
• Amazon Tax
• Digital Services Tax
• Equalization Levy

So in essence, Google Tax is an indirect tax aimed at foreign digital companies earning sizeable income from India through online advertising, provision of digital services etc. Read on to fully understand what comprises Google Tax in India.

Why Was Google Tax Introduced?

In 2016, the Indian government for the first time introduced a 6% Equalization Levy on payments exceeding ₹1 lakh a year to a non-resident company for specified services.

This was in response to the rise of the digital economy where technology firms like Google, Facebook, LinkedIn provide online advertising and other digital services in India while paying minimal taxes.

They were able to avoid tax since they did not have a permanent establishment in India which is traditionally required for taxation. The new levy aimed to tax these digital transactions and revenue earned by foreign companies from the Indian market.

Some key reasons for introducing Google Tax were:

• Plug Tax Evasion: Global tech giants use tax havens to avoid paying full taxes on profits earned in India. Google Tax makes them liable to pay taxes on India revenues.
• Equalize Tax Burden: Indian companies pay direct taxes like income tax. Foreign e-commerce firms pay minimal tax due to no physical presence despite huge profits. Google Tax creates parity.
• Shore Up Tax Revenue: Tax revenue was leaking abroad due to no tax on foreign digital companies. Google Tax earns revenue on these India profits.
• Encourage Tech Transfer & Local Investment: Google Tax makes simply exporting digital services to India less profitable. May incentivize tech transfer and local entity creation.
• Keep Up With The Times: Traditional tax laws are outdated for new digital economy. Google Tax gets digital services under the tax net.

Overall, Google Tax in India aimed to tax the digital economy and create a level playing field between domestic and foreign online businesses.

What Services Fall Under Google Tax?

The Equalization Levy is applicable on consideration received for specified services provided online or digitally. The key services covered under Google Tax are:

• Online Advertising: Ads on websites, social media platforms, search engines etc. Example: Google AdWords
• Digital Advertising Space: Providing advertising space on a digital platform or to an Indian resident.
• Any Provision For Digital Advertising: Facilitating online ads through any kind of support, design, software, etc.
• Online Sale Of Data Collected From India: Sale of any data collected from an Indian resident or company. Example: Google selling search data insights.
• Online Provision Of Content: Providing any digital content to Indian residents or companies. Example: Netflix, Amazon Prime Video.

So essentially any payment made for online advertising services, digital advertising space, online content provision or data sale is liable for the 6% Google Tax if it crosses the ₹1 lakh threshold.

Tax Rate and Threshold Limits

The Equalization Levy imposes a flat 6% tax rate on all payments above ₹1 lakh annually to a foreign service provider for specified digital services.

For example, if an Indian company makes a payment of ₹5 lakhs in a year to Google Ireland for online advertising services, 6% Google Tax has to be paid on the amount above ₹1 lakh i.e. on ₹4 lakhs.

So the total Google Tax payable would be 6% of ₹4 lakhs = ₹24,000.

Some key threshold limits are:

• Tax rate: 6% flat on eligible amounts
• Lower limit: No tax if payment <₹1 lakh per year
• Upper limit: No upper limit, 6% tax on entire amount if above ₹1 lakh annual payment
• Aggregate limit: Tax applies if all payments aggregated exceed ₹1 lakh per year

So the Google Tax net catches all high value digital service payments provided by foreign entities to Indian residents or companies.

Who Needs to Pay Google Tax?

Google Tax shifts the tax liability onto the Indian resident or entity making payments to a non-resident/foreign company for specified services.

For the digital services taxable under Google Tax, it is the Indian client who must:

• Deduct 6% Google Tax from payments to foreign provider
• Deposit this with the government
• File monthly tax returns

This shifts compliance burden to Indian residents and makes foreign digital companies liable for tax on India profits without their active involvement.

So essentially, the liability to pay Google Tax is on Indian residents or companies procuring specified online services from non-resident providers.

How Will Goookkkgle Tax Impact Businesses?

Here are some of the key ways Google Tax could impact companies and digital services in India:

• Increased Costs: Indian businesses may see costs go up by 6% for digital services from foreign providers. Additional compliance burden as well.
• Level Playing Field: Google Tax makes foreign digital companies pay taxes on India profits just like resident startups creating parity.
• Move Towards Localization: Foreign tech giants may be incentivized to create local subsidiaries or move operations to India to avoid Google Tax.
• Reduce Dependence on Foreign Players: Higher costs for outsourcing digital work to foreign vendors may encourage Indian companies to switch to local players.
• Greater Tax Revenue: Google Tax estimated to have earned ₹4700+ crores tax revenue for the government in 3 years showing its effectiveness.
• Enabling Fair Taxation of the Digital Economy: Google tax lays the framework to tax cross-border digital transactions creating fairness in treatment.

The 6% transaction tax rate seems unlikely to completely disrupt businesses. But over time, Google Tax will significantly shape the digital economy landscape both for foreign tech giants as well as Indian resident companies and consumers.

Tax Collection and Payment Mechanism

The Google Tax or Equalization Levy requires Indian entities to deduct and deposit taxes when making payments to non-resident companies. Here is the tax payment process:

• Indian payer deducts 6% Equalization Levy when making payment to foreign provider for specified services.
• The payer then deposits the tax amount with the Indian government.
• The tax has to be paid by the 7th day of the next month. For example, tax deducted in January has to be paid by 7th February.
• After payment, the Indian company is required to file monthly tax returns in Form 1 detailing payments made and tax deductions.
• The foreign service provider can claim refunds or credits on the Equalization Levy in their country of residence.

So the entire compliance burden – deducting, depositing, and reporting Google Tax is on the Indian payer entity. The foreign service provider only has to claim relevant credits on the tax paid.

Penalties for Non-Compliance

Failing to pay or report Google Tax can attract the following penalties as per current tax laws:

• Interest @1% per month for delay in payment. Interest applies from original due date.
• Penalty up to 200% of tax amount for substantial evasion.
• Prosecution for willful tax evasion with punishment of 6 months to 7 years.
• Blacklisting of service recipient for future government contracts in case of tax defaults.

Since the tax liability is on the Indian payer company, they face penalties for non-payment or inadequate deduction of Google Tax.

Ensuring timely compliance as per laid out procedures is advisable to avoid legal and financial repercussions.

Future Scope and Direction

Google Tax or Equalization Levy is only likely to expand in scope and coverage in the future as digital services grow. Some expected developments are:

• Expanding the list of services covered – streaming, cloud services, SaaS etc.
• Lowering the threshold limit from ₹1 lakh to expand tax net.
• Increasing tax rate from 6% to capture greater revenue.
• Tightening compliance requirements and increasing penalties.
• Pushing foreign tech companies to increase local presence leading to growth in investment and jobs.

Google Tax has already earned around ₹4700 crores for the government showing the taxation potential of the digital economy. Its scope is only expected to widen going forward.

Thoughtful expansion keeping in mind impacts on small businesses and startups will be crucial for balanced growth of the digital services sector in India.

FAQs on Google Tax

Q: Who introduced the concept of Google Tax in India?

A: Google Tax or Equalization Levy was first introduced in India during the 2016 budget by the Finance Minister, Mr. Arun Jaitley.

Q: Are only foreign companies liable to pay Google Tax?

A: No, the liability and compliance burden to deduct and pay Google Tax is on the Indian resident or entity making payments to a foreign service provider.

Q: Does Google Tax apply even if the foreign entity providing services has an Indian subsidiary?

A: Yes, the levy applies on payments made to non-resident companies. So even if the overseas parent company has an Indian arm, the India entity would need to deduct Google Tax on payments to the foreign parent entity.

Q: Can an Indian payer company recover Equalization Levy from the foreign service recipient?

A: Legally, the Google Tax is a liability of the Indian payer company, so the additional 6% cannot be billed to the foreign vendor providing digital services.

Q: Is there a maximum cap on the Equalization Levy?

A: No, there is no upper limit on Google Tax. 6% Equalization Levy has to deducted and paid on any amount exceeding ₹1 lakh annually to a foreign company for specified services.

Conclusion

Google Tax or Equalization Levy is a smart taxation move by India to claim its fair share of revenues from the digital economy dominated by foreign technology giants. Proper implementation can help drive innovation and growth of homegrown startups.

As digitization blurs geographical barriers, new digital taxation frameworks like Google Tax will be needed to prevent base erosion by foreign companies in any country. However, the concerns of small business and potential complexities need balanced resolution.

Businesses procuring digital services from abroad should ensure full compliance and timely payment of Google Tax to prevent harsh penalties. Stay up to date on the latest developments as India fine tunes digital taxation to meet the needs of a changing economy.

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