Why India’s “Google Tax” Risks Opening Pandora’s Box

Will what India calls “Google tax” backfire?

Sundai Pichai at the Google for India keynote. Photo used for representational purpose. (Photo: ANI Screengrab)

While governments around the world are shocked at the meagre taxes multinationals pay, India has decided to take the fight to the mighty.

From 1 June, 6 cents out of every dollar Indian merchants pay to advertise their wares on a foreign website such as Google, Facebook or Yahoo will go to New Delhi.

The equalisation levy (called the Google Tax informally) isn’t part of the Indian tax code; it’s just something that Finance Minister Arun Jaitley slipped into his annual Budget in February.

Whatever its legal status, 6 percent is a big deal.

Alphabet, the owner of Google and a muscular user of international tax-saving devices like “Double Irish” and “Double Sandwich,” paid 4 percent of its global revenue as income tax in its latest full year. For Amazon, the figure was an even more derisory 1.2 percent.

Indian advertisers must now withhold the levy from the money they pay websites that aren’t taxable entities in India, and hand it over to the government. Whether the merchants will be able to deduct the amount from what they’re billed, or whether websites will simply jack up their rates, depends on who holds the bargaining chips.

Search and Social

Google and Facebook have the strongest claims on India’s fast-growing online advertising market

When it comes to Google and Facebook, Indian merchants don’t really have homegrown alternatives. So the levy will simply get passed on to customers.

Were it to be introduced as a tax, countries where the online ad revenue is being booked would have to grant offsets on the amounts paid in India. Those savings could then be shared, and the final increase in the price paid by the Indian advertiser would be less than 6 percent.

It’s unclear whether a levy in India would be entitled to a tax offset in another country. This begs the question – is India is cutting off the nose of its $1 billion digital advertising industry, estimated to grow by 47.5 percent this year, to spite the face of global tax avoiders?

More worryingly, Jaitley has said that the objective is to “tap tax on income accruing to foreign e-commerce companies from India.”

That suggests the tool may be more widely used later, especially if Indian online commerce does quadruple to $60 billion by 2020, as predicted by Google and AT Kearney.

Google and Facebook have the strongest claims on India’s fast-growing online advertising market. (Photo: iStockphoto)

India’s homespun solution to the problem of taxing cross-border online advertising risks clashing with a new OECD framework on base erosion and profit shifting, which urged countries to avoid working at cross purposes.

To avoid artificially inflating the cost of doing business online, New Delhi should either press the OECD to accept the equalization levy as a global standard, or re-introduce the measure as a tax.

The trouble is that trying to tax foreigners could open up a Pandora’s box of new quarrels, when New Delhi is struggling to settle long-pending disputes with the likes of Vodafone.

After all, if India gives itself the right to tax Google, then nothing stops Vodafone from arguing that the nation should collect a $2.1 billion capital-gains levy from Hong Kong billionaire Li Ka-shing instead of the U.K. telecom company (India argues that Vodafone should have withheld the amount from Li’s Hutchison when it acquired the latter’s local business).

That most certainly wouldn’t be the beginning of a beautiful friendship. Only if the payments add up to $1,500 or more in a year.