If you are into publishing apps on Apple, Google, Microsoft stores or want to advertise on their platforms, chances are you will have to shell out more tax. What started off as an intent to tax tech multinationals that are raking in millions of dollars out of advertisements and related areas could end up distorting the playing field for Indian companies.
The committee for Central Board of Direct Taxes has recommended levying a tax on transactions done through apps in the range of 6-8 per cent. While the scope of services does not cover “app purchases”, there is ambiguity over who will pay the tax — whether the tech multinationals or people using their platforms and even what comes under the tax category?
While some believe that multinationals will absorb the cost, others think there are no free lunches.
“Eventually the tax will be passed on to end users,” says Sandeep Ladda, Leader, Technology and E-commerce, PwC India, adding that over time more things (apart from online advertisements) will be taxed.
Industry watchers say that the equalisation levy would eventually translate into start-ups ending up paying 6 per cent on top of the 14.5 per cent service tax. This will make digital advertisement more expensive for start-ups and increase compliance-related issues.
For example, assume that you run a company and want to pay ₹5 lakh to a foreign company for using its online advertisement services. After the new tax is in place, you will need to withhold 6 per cent or ₹30,000 and pay the balance of ₹4,70,000. Google Tax of ₹30,000 will have to be remitted to the government.
“Whether the foreign company will bear the cost or will increase its price by grossing up the tax amount remains to be seen,” says Nipun Goyal, Co-founder, Curofy, a health-tech start-up.
“It is not a good thing to happen at this juncture as there is already a service tax,” says Sumit Khandelwal, co-founder, Giftxoxo, a gifting company.
Detailed emails sent to Google, Apple and Microsoft India remained unanswered.
The industry, meanwhile, is baffled that these multinationals will not absorb the costs.
Bharat Goenka, Co-founder and MD, Tally Solutions, is miffed: “These companies want to operate in India but do not provide any reverse economic benefit. If you are not participating in the economy why should the country take it?”
It also raises questions around tax disclosure. “If I pay this recurring tax to Google, how can I make a disclosure,” asks Hitesh Gossain, Founder of Onspon, an event start-up venture.
Some in the industry say that this move by the government is to get the tech giants to route transactions through the India subsidiary.
Also, this would not impact investment plans of these tech giants which see this as a growing market, says Abey Zachariah, co-founder and CEO, Goodbox, an app to chat and order things. In 2015, Indian digital ad spends were estimated at ₹4,661 crore, according to GroupM.