Explained: What is India’s Google Tax and why there is controversy over it

In this article, Krishnanand Tripathi, Deputy News Editor of ETV Bharat, explains India's Google Tax and why there is controversy over it. He also mentions couple of recent events that led to pop-up the issue of Google Tax or Equalization Levy.

New Delhi: A spate of new developments have once again triggered the debate on an Equalization Levy imposed by the Indian government on global internet giants like Google, Facebook, Twitter, Microsoft, Apple, Amazon and several others on their India operations over four years ago.

These global tech giants have a significant business presence and user base in the country, earning a significant amount of revenue from their Indian operations but due to several factors and international treaty obligations, not liable to pay any taxes in the country.

The issue of Google Tax or Equalization Levy came to the fore primarily due to the two recent events. First, the US government last month opened an investigation into the digital tax imposed by some nine countries, including India and France which may also lead to retaliatory trade measures by the US.

Secondly, the Indian government recently modified the tax form or Challan (ITNS285) to include e-commerce operator for e-commerce supply or services as a new category for paying the Equalization Levy which was imposed in 2016.

History of Equalisation Levy or Google Tax in India

In order to tax the income accruing to foreign internet and e-commerce companies from their India operations, former finance minister Arun Jaitley had announced the imposition of an Equalization Levy in his budget speech in February 2016.

As per the budget proposal, a levy of 6% became applicable from June 1, 2016.

This levy at the rate of 6% was to be collected under the reverse-charge mechanism, it means an Indian entity receiving online advertisement services from a non-resident ill be required to add an amount of 6% over and above the bill raised by the foreign service provider and deposit the tax to the government.

Jaitley had said that it would only be applicable to B2B transactions where the value of the transaction in a year will be more than Rs 1 lakh.

In case of GST and erstwhile Service Tax, the service provider adds the applicable tax on the total billed amount, collects it from the service recipient and deposits to the government.

Whereas, in case of Equalization Levy, the government decided to charge the tax under the reverse-charge mechanism as these global tech giants ordinarily raise bill from their registered offices located outside India, for example, Ireland which is a low tax jurisdiction that keeps these companies out of the ambit of Indian tax authorities.

As per the established principles of global trade, a company is liable to be taxed at its principal place of business.

The controversy around Google Tax

There is a shrill debate over the efforts by some governments, including India and France, to tax global tech giants if they have a significant business presence and user base in the country but don’t pay any taxes.

For example, India provides some of the largest user bases to these global tech giants.

According to some estimates, India has over 260 million Facebook users which is the largest user base for the social media giant founded by Mark Zuckerberg, 200 million WhatsApp users which have also become part of Facebook Inc.

India also has 50 million users on professional networking site LinkedIn which makes almost 10% of the company’s global user base.

Similarly, India also provides some of the biggest markets and user base to search engine giant Google, micro-blogging site Twitter, and Microsoft among others.

These companies offer a host of marketing, advertising and other services but are not liable to pay taxes in India as per the international treaties and conventions as they were forged before the start of the digital era.

India has been lobbying hard for evolving a global consensus to find ways to tax the country-specific operations of these tech giants.

Finance Minister Nirmala Sitharaman had raised this issue in her first foreign visit to attend G-20 summit in Japan last year.

India's views are supported by European and some other countries like France, Brazil, and Turkey as they too have been grappling with the issue.

Google Tax: France sets the example for others

In September 2019, Google agreed to pay $1.1 billion to French tax authorities to settle a tax fraud probe in the country which started almost at the same time when India also announced Equalization Levy.

Google operates in all European countries but pays very little tax as it reports all the sales from its office registered in Dublin, Ireland.

Following the verdict, French authorities said that it was just beginning and many other global tech giants will also be required to disclose and pay taxes on their French operations

How OECD-G20 plan to tackle Google Tax

OECD and G20 have been leading a joint international effort involving some 135 countries to settle the dispute on avoidance of tax payment by global tech giants.

This phenomenon of exploiting loopholes by utilizing international tax treaties is referred as Base Erosion and Profit Shifting (BEPS).

Base Erosion and Profit Shifting (BEPS) basically refers to tax planning strategies used by global corporations that exploit gaps and mismatches in tax rules to avoid paying tax.

OECD estimates that it leads to a revenue loss of $100-240 billion in revenues to the affected countries, which is 4-10% of the global corporate tax revenue.

In India, Equalization Levy is in its infancy as, according to reports, the Union government has just collected over Rs 2,600 crores in Equalization Levy in last four years.

However, the recent moves clearly indicate that the government will strengthen it to bring more transactions under its ambit.