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)

 

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