Elimination of Digital Tax on Online Advertisements Suggested to Take Effect as of April 1
The Indian government's decision to abolish the 6% Equalisation Levy on online advertisements from April 1, 2023, is a significant move aimed at easing tensions with the United States regarding digital taxation and related trade frictions.
Significance in relation to US tariff threats:
The Equalisation Levy, often referred to as the "Google Tax," had been viewed by the US as a form of digital service tax primarily targeting American tech giants like Google, Facebook, and Amazon. Its presence was a point of contention in India-US trade relations. The abolition aligns with ongoing efforts to de-escalate tariff tensions between India and the US. The US had previously threatened tariffs on Indian imports, partly in response to India's taxation of US digital firms and other trade issues.
By removing this levy, India signals willingness to cooperate on digital trade issues, potentially avoiding further tariff hikes or retaliatory measures by the US. This move may help prevent US tariff escalations while supporting India's evolving digital economy.
Impact on the digital advertising industry:
The levy was a 6% tax on online advertising services provided by non-resident digital companies, effectively increasing costs for these firms and possibly passed on to advertisers and eventually consumers. Its abolition reduces the tax burden on foreign digital advertising firms operating in India, encouraging more investment and growth in the digital advertising ecosystem within India.
Broader implications:
The removal can be seen as part of India's pragmatic strategy to balance domestic revenue interests and international trade relations, especially amid broader US-India economic negotiations and the global push for an OECD-led digital tax framework. It may facilitate smoother India-US economic ties and reinforce India's position in the digital domain without provoking retaliatory tariffs or trade barriers from the US.
However, it remains to be seen if this step, coupled with ongoing diplomatic measures, would lead to any softening of stance by the US.
In addition, the Finance Act 2020 has extended the scope of the equalisation levy to e-commerce supplies and services made on or after April 1, 2020. The government has proposed to abolish the equalisation levy or digital tax on online advertisements from April 1, 2023.
Meanwhile, Congress MP Shashi Tharoor has criticised the government's budget as a 'classic case of patchwork' and compared it to a garage mechanic making the horn louder instead of fixing the brakes. Tharoor also pointed out that India has multiple and confusing GST rates, including the highest GST rate in the world at 28%. He compared India's GST structure to that of countries like Thailand, China, and Vietnam, which have lower GST rates and manage to collect a higher percentage of their GDP.
In response, BJP's Nishikant Dubey dismissed Tharoor's claim, stating that the country's economy, which was worth $2 trillion, has increased to $4.5 trillion in the last ten years. Deloitte India Partner Sumit Singhania stated that the government's move to do away with the equalisation levy in its entirety is in sync with the present endeavor of carrying out simplification of income tax legislation. AKM Global Tax Partner Amit Maheshwari added that the government is trying to show a more accommodative stance in anticipation of more tariff retaliation by the US.
In conclusion, the abolition of the Equalisation Levy on online advertisements is a significant step towards easing tensions with the US and supporting India's digital economy. However, the government still faces challenges in simplifying India's tax structure and addressing concerns about its complex and confusing GST rates.
- The move to abolish the Equalisation Levy on online advertisements in India potentially benefits the digital advertising industry by removing a 6% tax on online advertising services, thereby reducing the tax burden on foreign digital advertising firms and encouraging more investment and growth.
- The Indian government's decision to remove the Equalisation Levy is part of a broader strategy to navigate international trade relations, particularly with the US, by addressing a contentious issue in the digital taxation of American tech giants, while also working towards an OECD-led digital tax framework.