Equalisation Levy (Google Tax): Impact for Startups; FAQs, Compliances & Penalties

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 Facebook’s and Google’s of the world. These foreign advertisement platforms are going to pass on the “extra costs” to the end customers(advertisers), i.e., the SMEs and startups who use digital advertising as a channel, to reach their customers.

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.

This may surely impact startups as it will be hard for them to pass on the costs to customers due to local competition.This will further burden the fund-deficit startups who will have to eventually cut down on their marketing budgets. Any cut of digital advertising budgets will show direct effect on the customer acquisition and growth of the company.

It is felt that startups will need to tweak their short term and long term marketing plans, if they heavily rely on Google and Facebook for marketing.

Equalisation Levy was introduced in the Union Budget 2016 and is included in the Chapter VIII of the Finance Act 2016. The Govt. had set up a committee earlier this year which gave its recommendations in March, 2016, which included adding more services under the ‘specified service’ banner. The recommendations included added services like “designing, creating, hosting or maintenance of website, digital space for website, advertising, emails, online computing, blogs, online content, gaming, online data or any other online facility and any provision for uploading, storing or distribution of digital content”.

Digital advertising is heavily used as a tool by startups,  to register rapid growth consistently, and this is only achievable through maximum customer acquisition and retention.

This move by the government might go unnoticed by the foreign digital advertising giants, but will burn a hole in the cash-crunched pockets of Indian startups.

According to a notice from Google, this levy is charged directly to the advertisers and not taken from the profit of the ad network (Google). An example of the communication is illustrated below:

“Hello, This is to inform you that as per the Notification No. 37/ 2016: F.No. 370142/12/2016­TPL dated 27 May 2016 read with Finance Act, 2016, Government of India has levied an ‘Equalisation Levy’ on provision of online advertisement services or any other service or facility for the purpose of online advertisement by a Foreign Company provided on or after June 1, 2016 to specified customers in India. The applicable rate of the levy is 6% of value of fees for providing online advertisement or related services. Google Payments Notification regarding Equalisation Levy As you are aware, the terms and conditions applicable to AdWords require customers to bear any tax or Government charges on the services availed of by them. Accordingly, with respect to invoices raised by Google for online advertisement and service for the purpose of online advertisement provided on or after 1 June 2016, you will need to deposit 6% Equalisation Levy (as applicable). The Google Payments Team”

Nobody is sure about the degree of impact of this levy. However, this is something that is worrying the startup world, especially as it heavily relies on digital advertising to get the word out.

FAQ on Equalisation Levy

What is EQL?

EQL stands for Equalisation Levy. It will be charged on digital service provided in India (mainly Advertising) by non-resident company.

Why is it charged?

The non-resident companies would often escape any kind of Tax in India. To curb this, Govt. introduced EQL @ 6% on all those non-resident entities who do not have any permanent establishment in India.

Which services comes under it purview?

EQL is chargeable to specified services mentioned in the notification. So far only Advertisement has been added to the list of ‘specified services’.

What are specified services?

Specified Services include online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf.

To whom is it applicable?

Any non-resident entity that does not have any permanent establishment in India will come under this Tax. EQL is applicable to entities such as Google, Yahoo, Facebook etc. who earn huge revenues from India by providing digital service of Advertising.

What is the rate?

EQL is levied at the rate of 6% on specified digital services.

How will it be implemented?

EQL will be deductible at source, in similar way as withholding tax . Its operation will be same as TDS. The payment made to digital service provider will be only after deducting 6% as EQL. Threshold limit has been set as Rs.1Lac. It means if the specified services received by the service receiver is above Rs.1 lac during the year from the non-resident company, then EQL would be levied.

For Example: Google charges Rs. 10,00,000 from Flipkart for providing advertising service, then Flipkart shall pay Google only Rs. 9,40,000 after charging EQL of Rs. 60,000 ( 10,00,000 @ 6% ).

What if an entity fail to charge EQL from the service provider?

In case an entity(service receiver) fails to charge EQL from the service provider then the EQL burden will be shifted to the recipient of the service i.e. service receiver

Any EQL exemption?

It is enlisted as below :

EQL is not levied if the total amount for services received in the previous year is equal or less than Rs.1 lakh.

EQL is levied only to B2B(Business to Business), not in case of B2C (Business to Consumer)

If company registered in Jammu & Kashmir, then EQL is not applicable on such company.

How does it affect businesses?

It is expected that the service provider will shift the burden of such tax on the recipient of the service by charging the tax amount to the recipients causing money drain to domestic companies and start-ups.

Is it applicable to individual consumer?

EQL is only applicable to business to business (B2B) transactions. Businesses to consumer (B2C) transactions are exempt from such tax.

Computation and Payment of Equalisation Levy

Computation – EQL, interest and penalty payable shall be rounded off to nearest multiple of ten rupees

Payment – EQL should be paid monthly through EQL challan by the 7th day of the month immediately following the month.

EQL Return

As per Section 167 of Finance Act 2016,Rule 5 and 6 , Annual return is required to be furnished electronically in Form No.1 on or before 30th June immediately following that financial year.

Processing of EQL Return

Where any levy, interest or penalty is payable under EQL provision, a notice of demand specified in Form No.2 shall be served upon the taxpayer.

Consequences for Non Compliance of EQL

For delayed payment of EQL

Simple Interest @1% for delayed payment of EQL for every month or part of the month is delayed in payment of EQL

For failure to deduct or pay EQL

Fails to deduct the whole or any part of EQL – Penalty equal to the amount of EQL

EQL deducted , fails to pay such levy – A penalty of Rs.1,000 for every day during which the failure continue, however penalty shall not exceed the EQL itself.

Further, Disallowance of Expense u/s 40(a)(ib) if EQL is not deducted on the consideration which is deductible as per the provisions of Finance Act 2016

Filing of Appeal

Authority Sections & Rules Form no. Fees Duration
CIT(A) Section 174, Rule 8 of the Finance Act, 2016 Form no.3 ₹1,000 Within 30 days from the receipt of the penalty order
Appeallate Tribunal Section 175, Rule 9 of the Finance Act, 2016 Form no.4(In triplicate) ₹1,000 Within 60 days from the receipt of the order from CIT(A)

 

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor blog.startupmoksha.in and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of the author.

10 legal aspects to watch out for by start-ups

Setting up your startup involves a lot of work and effort. Many things need attention, including developing a proof of concept, finding product/market fit, and hiring the first set of employees. With these many things to be handled, slips are bound to happen. One of the most common areas where most startups make a wrong choice is establishing a solid legal foundation.

For startups, particularly in the sectors like e-commerce, payments, food or health care, it becomes all the more important to focus on the legal aspect. You don’t want to make the same mistakes as someone else, rather learn from it, isn’t it?

Some of the most common legal mistakes made by startups:

1) Wrong legal entity

Choosing the right legal entity right at the outset is important. Some structures to choose from include a Registered Company (Public/Private Limited), LLP, proprietorship, and partnership. The more widely accepted one is a registered company, especially for any deals with foreign clients.

Go for a LLP or Limited Company if you do not want personal liability for the losses/liabilities of your startup. Choose the right form of legal entity to avoid any legal hassles and payment of higher taxes.

2) Not tracking expenses

Another mistake commonly made by startups is not keeping track of their expenses, however big or small it maybe, throughout the year. Many try and gather all receipts only when tax returns have to be filed! What is not documented is not deducted, and therefore, it is like leaving money in the open.

There are many options available to record and manage expenses. Entities can also hire accountants to manage these records, if volumes are high.

3) Lack of documentation

Each and every interaction, be it meeting minutes or anything else, must be on the record. It is important to have all documents in order at all times. Legal due diligence can make or break an investment deal.

4) Missing founders’ agreement

Every startup may or may not run or be essentially successful. It is therefore important to have a solid founders’ agreement in place, because it is worth thinking about how you and your co-founders might deal with failure. The founders’ agreement should contain all essential clauses such as ownership, vesting rights, and the roles and responsibilities of each founder, including salaries and terms of employment.

5) Mixing capital and revenue expenses

One of the major confusions for first-time business filers is about expenses. What expenses are considered assets /capital expenditure and which ones are called revenue expenses deductible in the P&L A/c. Higher-value items that will last significantly longer than one year are called Capital Expenditure/Assets/Equipment. For example, the expenses on laptop purchases are not deductible as revenue expenses in the P&L A/c, but only the depreciation/amortization on them is deductible over a period of time.

Things that are consumed over the course of a year come under revenue expenditure. If the equipment or capital items are by accident deducted as revenue expense, the tax department can determine that the expense has been improperly characterized and a deduction does not apply. Hence, be careful in accounting all such expenses.

6) Mixing personal and business expenses

Time and money are the biggest investments in a startup, and often the personal and business expenses become indistinguishable. This can be a source of confusion when taxes are being filed, and in some cases, can lead to deductions being disallowed on an ad-hoc basis by the revenue authorities and higher tax outgo as a result. The company should therefore have a financial account at the onset and separate records as well.

7) Not protecting intellectual property

Intellectual property (IP) is a startup’s most valuable asset. Trademarks, patents, and copyrights are the three essential components of IP. It is essential to not let anyone claim a right to your IP. Non-disclosure agreements are a way of ensuring this. Startups often neglect the protection of IP and suffer later.

8) Non-compliance with securities laws

Startup founders commonly issue stocks to angel investors, family, and friends. However, stocks issued without complying with specific disclosure and filing requirements under securities law can lead to serious legal issues at a later stage.

9) Missing regular tax payments

Businesses, be it sole proprietors or otherwise, are required to pay taxes in advance. This means they need to determine their taxes for the year in advance and pay as prescribed installments. They can get into trouble for not paying the taxes on time. It is therefore important to take regular stock of the profit/loss statement at each quarter and pay the advance taxes.

10) Not ensuring professional help for tax-related issues

A startup must appoint a tax consultant to ensure all regulations are being followed. This will also give you more time to focus on building your company, forming strategic relationships, and other things. It’s essential to make sure all regulations are being followed to the tee. Taxes are also not something that a company should revisit only once in a year.

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor blog.startupmoksha.in and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of the author.