India's Architect for Equalization Levy
"It is essentially about the bargaining power between the start-up and the foreign company as to who will bear how much amount."
Google tax, the name given to the equalization levy, was introduced in last year’s budget to therefore tax foreign ad networks earning revenues from digital advertisers in India, which unfortunately backfired with controversy of being ill-fated for start-ups.
Entrepreneur India interviews Akhilesh Ranjan, Chief Commissioner of Income Tax at Central Board of Direct Taxes under Ministry of Finance. Akhilesh headed the committee on taxation for e-commerce last year.
Take a sneak peek at the conversation of Entrepreneur India with India's architect for equalization policy, Akhilesh Ranjan on taxes.
Can’t this levy be replaced with foreign firms sharing part of their revenue?
These companies don’t offer their revenues to the government otherwise we would have no problem with this. Since these companies have managed to avoid paying taxes by saying that they don’t have permanent establishment in India, the levy is coming into being. Apart from levy, there is no other corporate taxation on their income.
Is there a possibility of foreign firms dictating terms for payment?
We understand that it is a difficult levy to administer for start-ups and small businesses because foreign enterprises having the muscle power might pass on the burden to them by not accepting the payment after tax deduction or enhance the charges for their services that compensate for the tax payments. We are now looking at ways to ensure that these enterprises pay the levy not their customers.
Do you think the tax rate could have been lower?
We think six per cent is not a very large amount and hence, we wanted to experiment as to how it works out administratively without impacting businesses. But these are issues which the market has to solve. It is essentially about the bargaining power between the start-up and the foreign company as to who will bear how much amount.
Isn’t this an additional burden with existing service tax or upcoming GST?
Service tax is an indirect tax. The principle that an enterprise must pay tax in the place where value is generated doesn’t fructify in the form of indirect taxation because in an indirect tax like service tax there are ways by which the producer or the service renderer doesn’t really bear the burden. Direct tax is the only way in which that principle can be served. Of course, when it comes to GST, it translates into a fairly high figure but that it is for the GST council to decide.
It seems to be an added compliance for businesses to adhere.
No. In fact there is hardly any compliance required in this. There is an amount to be deducted and paid and an annual statement has to be submitted for that. Nothing else like filing for returns, assessment procedures, penalties etc., is there. It is a straight forward simple levy.
(This article was first published in the February issue of Entrepreneur Magazine. To subscribe, click here)