The equalisation levy or popularly known as ‘Google tax’ which came into effect from June 1 is set to have an impact on the operations of Indian start-ups with higher financial burden and administrative overload.
Start-ups which are highly dependent on online platforms like Google, Facebook, Twitter, Linkedin to drive their business as it is also a cost effective option might now have to pay a tax of 6%.
Under the new rules, Indian advertisers will have to withhold 6% of the gross amount paid for online advertisements (payment of more than R1 lakh a year to an overseas technology company) as equalisation levy.
Ajith Karimpana, CEO and founder of Furlenco, a furniture rental start-up said, “We do expect the (advertisement) costs to go up in single percentage terms. Also, having different accounting standards for various spends makes it all the more complicated.”
Archit Gupta, CEO and founder,ClearTax.in said, “Online advertising costs for start-ups will increase by 6% if companies like Google or Facebook does not accept payments after deduction of the levy. In such cases, the start-up will have to pay the levy to the government out of its own pocket. This increase can severely affect the marketing budgets.”
The move was aimed at indirectly taxing global Internet firms, the likes of Google (Alphabet Inc), Yahoo, Facebook among others, who make money from Indian advertisers but don’t fall under the purview of taxation.
Shashishekhar Chaugule, Partner, Walker Chandiok & Co LLP, a tax and regulatory advisory firm said, “Google, Yahoo and Facebook claim that their servers on which they display ads are hosted outside and therefore that is not an income arising in India. This move by the Indian government is aimed at taxing such transaction. If Google and the likes do not want to bear the tax, the burden will certainly be shifted on Indian advertisers placing ads with these companies.”
In the current situation, it also becomes difficult for start-ups to have any kind of bargaining power to seek any waiver from this tax from the online service providers, according to industry observers. V Balakrishnan, partner, Exfinity Ventures, a VC and PE fund, felt that government could have exempted start-ups from the localisation levy as the threshold of tax is very low. “The government has a clear definition of start-ups and such a levy will certainly discourage them,” he added.