Govt gets tax bonanza from online ads on Google, Facebook

Tax receipts emerging from a levy on payments made to digital advertising platforms, for example, Google and Facebook, from Indian entities rose 59 per cent in FY2018-19.

In FY19, Rs 939 crores (US$ 134.35 million) were collected by tax department, up from Rs 595 crore (US4 84.42 million) a year earlier. The surge in tax collections suggests that to place advertisement, Indian entities paid digital platforms such as Facebook and google at least Rs 15,650 crores (US$ 2.24 billion) whereas, Rs 9,800 crores (US$ 1.40 billion) were spent in FY18.

On behalf of the offshore digital corporation the advertiser needs to deduct the tax at source and deposit it with the Indian government, only if the advertiser has spent more than Rs 1 lakh (US$ 1,430.82) on advertising on overseas platforms in last year. Therefore, the actual spending by Indian entities might be higher than what the tax collection numbers show.

The equalization levy was introduced from June 2016 as a tax deducted at source on payments to offshore digital firms such as mobile phone apps, social media platforms and digital content streaming services with a customer base in India. Taxing their profits efficiently is not easy for the department as either they may not be incorporated in India or may not be recognizing their entire revenue in the arm incorporated in India. Currently, the equalization levy is 6% of the amount paid.

Enormous growth in internet usage and wide availability of smartphones have also contributed to the growth of the digital economy, offering both domestic and overseas businesses opportunities to capitalize. A report by the ministry of electronics and information technology and McKinsey and Co. in February said India can create up to US$ 1 trillion of economic value from the digital economy in 2025, up from about US$ 200 billion at present.

"There is a huge potential for further growth in digital economy as well as tax revenue from this sector, only a small part of which-online advertisements-is taxed under the equalization levy at present. Growth in digital economy tax proceeds could be similar to the growth we had seen in the past in service tax proceeds," said Mr. Girish Vanvari, founder of advisory firm Transaction Square. The government can expand the scope of the tax to other services too.

The move announced in the Union Budget 2018-19 is to tax business with "significant economic presence" in terms of customer base or revenue even if they have small physical presence, by aiming to make the tax law in sync with the new service delivery models that technology has enabled.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.