Equalisation levy of 6 per cent on services pertaining to cross border digital transactions will come into force from June 1.
In order to tap tax on income accruing to foreign e-commerce companies from India, the Finance Act 2016 said a person making payment to a non-resident (who does not have a permanent establishment) exceeding in aggregate Rs 1 lakh in a year will withhold tax at 6 per cent of gross amount paid, as equalisation levy. The levy will only apply to business to business transactions.
The Committee on Taxation of E-commerce set up by the CBDT in its report submitted to the government in February had suggested introduction of equalisation levy between 6-8 per cent on amount paid to non-resident by an Indian resident for specified digital services.
The specified services would include online advertising or any services, rights or use of software for online advertising, including advertising on radio and television, designing, hosting or maintenance of websites, digital space for website, e-mails, blogs, facility for online sale of goods or services or collecting online payments.
The levy would not be applicable to non-resident service providers having a PE in India, as they will be subject to regular PE-basis taxation. Introduction of this tax is based on the Base Erosion and Profit Shifting (BEPS) report, which was earlier endorsed by G20 and OECD (Organisation for Economic Co-operation and Development).
Online marketing is very important for startups, because of its comparatively lower cost and targeted customer reach. Google and Facebook ads are the most popular and effective platforms as of now and this levy will eventually impact the small local players more severely than the giant-sized Facebooks and Googles of the world. These foreign advertisement platforms are going to pass on the “extra costs” to the ultimate customers, i.e., the SMEs and startups who sustain on digital advertising.
The equalisation levy would translate into startups ending up paying six percent over the 14.5 percent service tax. Thus, making digital advertisement more expensive for local Indian advertisers.