“The levy puts us in a precarious position because all these companies- Google and Facebook- which are the most popular advertising platforms for us, are going to make us pay more at the end of the day,” said Manik Mehta, co-founder Leaf Wearables, which is a smart jewellery startup that works in the area of women safety.
An eight-member committee on taxation of e-commerce had in March proposed that services ranging from online advertising and cloud computing to software downloads and web hosting be subject to an “equalisation levy” of 6-8% of gross payment if the provider of the service is a foreign entity without a “permanent establishment” in India.
The rationale behind the levy was is to way for the government to get foreign internet companies such as Google and Facebook pay taxes in India.
“Under the existing law and double taxation avoidance treaty, India will not be able to tax them. How can India allow this kind of revenue loss?” said Rashmin Sanghvi, Chartered Accountant, Expert on international taxation and taxation of e-commerce, who was part of the equalisation levy committee.
However, because of the nature of the levy, the companies will not be eligible for credits in their home countries, which means the levy is likely to be passed on to users of their advertising platforms, such as startups and small and medium businesses.
Online advertising makes more sense for startups because of its targeted reach and lower cost, but the additional levy would mean they could end up paying 6% over the 14.5% service tax.
For startups such as digital media agency Corpus Digital, which works on digital campaigns for small businesses, the levy could mean increased difficulty in collecting payments and eventual loss in business.
“Typically, for an SMB client, the media spend is between Rs 50 lakh- Rs 1 crore a month. The taxes are over and above this cost- service tax is 14.5% and 10-15% is the agency’s commission. Collecting this money is also painful sometimes, and now if a further 6% is added, small businesses that we deal will might decide to change the structure of their digital spends altogether, and we could end up losing business,” said Sarita Singh, founder of Gurgaon-based Corpus Digital.
Committee members agreed that the question of startups or Indian businesses having to pay this cost was discussed at length in the deliberations before the recommendation for the levy was finalised.
“This is a tax on non-residents, and if startups are unable to bargain properly with them, it will be a burden on the startup,” said Nihar Jambusaria, chairman, committee on international taxation of the Institute of Chartered Accountants of India (ICAI), who was also part of the Committee.
He added that the government want to “test” this levy with online advertisements to begin with, and will have to find an alternative to get non-resident companies credits, similar to the way the Mauritius treaty has been re-negotiated.
“Its quite ironic that the Prime Minister’s entire election campaign did marketing online. They used the online medium to reach the maximum people, but this can’t happen in the future. The cost and budgeting will be affected a lot,” said Leaf Wearables’ Mehta.
He added that the hardware startup business is very complicated and not start up friendly, so they would be “impacted even more”.
The bigger plan, said Sanghvi, was to have the tax for non-resident companies deducted at source. But such a system will take about two years to become fully functional. Until then, if the startups are unable to strike a good bargain with the online advertising giants, they will have to pay the levy.
“Supposing you had an income from USA, that income is taxable in USA. The US government will ask the US resident making payment to you to pay tax at source. The principle is the same,” he said.
Get Unlimited Access to The Economic Times
