Google and Meta benefits as questions are being raised about public tax revenue loss
The recent move by the Indian government to do away with the 6% Equalisation Levy on digital ad services has raised questions about its impact on the digital ad industry and the country’s tax earnings. The levy, also called the “Google Tax,” was introduced in 2016 to tax income earned by non-resident digital businesses offering services to Indian companies.
History of the Equalisation Levy
The Equalisation Levy was brought in to make foreign digital service providers contribute their share of taxes towards the Indian exchequer. This was imposed as these providers were gaining heavily from the growing digital economy without being physically present in the country. Initially, at 6% on online advertising services, the field of the levy was extended in 2020 to impose a 2% tax on e-commerce firms with revenues of more than ₹2 crore annually in India.
Reasons for the Proposed Abolition
Several factors have influenced the government’s decision to propose the removal of this levy:
International Trade Relations: The United States has criticized the levy as discriminatory, arguing that it unfairly targets American tech giants like Google and Meta. By proposing its removal, India aims to ease trade tensions and boost a better relationship with the US, which had previously threatened reciprocal tariffs.
Simplification of Tax Regime: The tax added complexity to the tax burden of foreign businesses operating in India. Its elimination may simplify the tax regulations, with compliance being easier for foreign businesses.
Promoting Digital Growth: Removing the levy would render digital advertising cheaper, especially for Indian startups and small businesses. The step is expected to encourage higher investment in digital marketing, thus, growing the entire digital economy.
Possible Influence on Digital Advertising
The proposed removal is set to have many impacts on the digital advertisement industry:
Less Advertising Expenses: Advertisers would likely have lesser expenditures when buying digital ad products from international platforms. Thus, possibly resulting in higher advertising budgets and wider campaigns.
Boost for International Tech Companies: Companies such as Google and Meta, which together control a large part of India’s digital ad market. These giants will indirectly benefit as advertisers have lower total expenditures in placing advertisements on their platforms.
Competitive Landscape: Local digital advertising platforms might have to rethink their approaches. This is to stay competitive since the cost advantage they enjoyed through the levy fades.
Implications for Tax Revenue
While the action is set to benefit the digital advertising business, it leaves the question of losses in tax revenue hanging:
Revenue Lost: The government had collected ₹3,343 crore under the Equalisation Levy during the current financial year till March 15. Scrapping the levy implies missing a significant source of revenue.
Balance Sheet: The government would have to seek other sources of compensation for losing this one so that public goods and development initiatives do not get starved.
Conclusion
The suggestion to eliminate the 6% Equalisation Levy is a major turning point in India’s digital tax policy. Although it has the potential to give a boost to the industry and improve bilateral trade ties with the United States, it also comes with issues like tax revenue cuts. Policymakers need to now walk a thin line between meeting the needs of creating a friendly business environment and keeping public finances healthy.
