Tax Implications on Digital Advertising: Understanding TDS, Withholding Tax & Equalisation Levy
The contemporary adage is businesses cannot thrive without online marketing. As a result, the intricacies of Indian taxation compound profoundly, but most of the time, it confounds our entire tax system.
Many entrepreneurs who invest in advertising through giants like Google Ads and Meta often find themselves grappling with the complexities of tax deductions.
It’s a scenario where the nuances of India’s Income Tax Act come into play, specifically Section 194C and the Equalisation Levy.
In this article, we will delve between the lines of tax deductions, withholding tax, and Equalisation Levy, shedding light on their implications for businesses engaged in digital advertising.
Analysing Tax Deducted at Source (TDS)
When making payments to Google Ads or Facebook for advertising services, businesses are required to deduct tax at Source (TDS) under section 194C of the Income Tax Act. However, it’s crucial to determine whether your transactions fall under this section.
A significant concern arises when payments are made using credit or debit cards, as there is no immediate option to deduct the tax amount. The policy adopted by Google Ads and Facebook regarding TDS is that the payer (i.e., your business) must bear the responsibility of depositing the TDS amount with the government.
Subsequently, you must submit the TDS certificates to Google Ads/Facebook, and the equivalent amount will then be credited back to your advertising account.
The applicable TDS rate is 2%, with no surcharge or education cess. For instance, if you spend Rs. 50,000 on advertising, you are obligated to remit Rs. 1,000 as TDS to the government.
Nature of Advertising Services
The classification of online marketing services depends on the nature of the services provided. These services can be categorised as either contractual services or technical services, depending on the extent of scripting, programming, and other technical aspects involved.
If the services require technical expertise, the TDS rate is 10%. In contrast, if the services primarily focus on creating visibility through platforms like Google AdWords and other search engines, they are considered contractual services, subject to a 2% TDS rate.
The Central Board of Direct Taxes (CBDT) has provided clarity on the matter, stating that tax should be deducted at source under section 194J when an advertising agency makes payments for professional services.
Furthermore, a distinction is made between payments made by a person to the advertising agency and payments made by the advertising agency to television channels or newspaper companies. Payments to an advertising agency fall under section 194C, whereas payments from the advertising agency to professionals fall under section 194J.
TDS rates also depend on the nature of the advertising contract. If the contract involves periodic payments (e.g., yearly, quarterly) or is based on the number of advertisements placed, TDS is deducted under section 194C. For section 194J, if the total payment made to the same person in a financial year is less than Rs. 30,000 – no TDS is required.
What is Withholding Tax?
Withholding tax, often referred to as tax deducted at source, applies to payments made to non-resident individuals. It is essential to note that withholding tax is imposed only on the chargeable income, and the payer must deposit the deducted tax with the government.
The rates are prescribed in the tax act or based on Double Taxation Avoidance Agreements (DTAA), whichever is more favourable for the non-resident individual.
The benefits of withholding tax include:
- Early Revenue Generation: Withholding tax ensures the government receives revenue promptly, eliminating the need to wait until the end of the fiscal year.
- Transaction Scrutiny: Every transaction is subject to scrutiny, as it is the payer’s responsibility to deduct and deposit the correct tax amount.
- Tax Evasion Prevention: Withholding tax minimises the possibility of tax evasion since both the payee and payer are within the tax net.
Rates o0f Withholding Tax
The applicable rates for withholding tax on various payments to non-resident individuals are as follows:
- Interest: 20%
- Dividends paid by domestic companies: Nil
- Royalties: 10%
- Technical Services: 10%
- Other Services:
- Individuals: 30% of the income
- Companies: 40% of the income
These rates apply to countries with which India does not have a Double Taxation Avoidance Agreement.
Assessment of Non-Resident Assessees
The assessment of non-resident assessees is typically done through an agent. Individuals or entities considered agents of non-resident assessees include employees or trustees of non-residents, those with business connections,
recipients of income, or those involved in capital asset transactions.
Consequences of non-payment or non-compliance with withholding tax regulations include penalties, interest, and disallowance of expenses.
Distinguishing Withholding Tax and TDS
While withholding tax and Tax Deducted at Source (TDS) may seem similar, they have distinct scopes and applications.
TDS is deducted at the time of payment to contractors and professionals within India while withholding tax applies to payments to non-residents in foreign transactions.
TDS is a concept specific to India, whereas withholding tax applies to international payments.
Equalisation Levy on Digital Transactions
The Indian government introduced the Equalisation Levy in 2016 to tax income accruing to foreign e-commerce companies from India, specifically business-to-business transactions.
This levy is imposed at a rate of 2% on considerations received or receivable by non-resident e-commerce operators.
Equalisation Levy on Online Advertisement Services
When non-residents provide online advertising services, including digital advertising space, for Indian recipients, an equalisation levy is deductible by the service recipient.
This levy applies to residents of India conducting business or non-residents with a Permanent Establishment (PE) in India. However, there are exceptions – such as when the non-resident has a PE in India or when the consideration is below a specified threshold.
Background and Relevance of Equalisation Levy
The rapid expansion of the IT sector globally and in India has led to increased digital service transactions. It has created tax challenges related to nexus, characterisation, and valuation of data and user contributions.
To address these issues, the Indian government introduced the Equalisation Levy as part of the Base Erosion and Profit Shifting (BEPS) Action Plan.
Applicability and Services Covered
Equalisation Levy is withheld by service recipients when making payments to non-resident service providers.
It applies when annual payments to one service provider exceed Rs. 1,00,000. Currently, the ambit of the Equalisation Levy encompasses services related to online advertising, provision of digital advertising space, and facilities or services for online advertising. Any future inclusions will be notified accordingly.
Rate of Tax under Equalisation Levy
The current rate of the Equalisation Levy is 6% of the gross consideration to be paid.
Example:
Suppose Arpan spends Rs. 2,00,000 on Facebook advertising in FY 2022-23. He would deduct TDS at 6% (Rs. 12,765.9) and pay the balance to Meta.
An Equalisation Levy is a direct tax imposed on certain digital services, and it’s withheld at the time of payment by the service recipient. To be liable for the equalisation levy, two conditions must be met:
- Payment to Non-Resident Service Provider: The payment should be made to a non-resident service provider.
- Annual Payment Threshold: The annual payment made to one service provider should exceed Rs. 1,00,000 in one financial year.
Services Covered Under Equalisation Levy
Currently, not all services fall under the ambit of the Equalisation Levy. The following services are covered:
- Online Advertisement: Any payment for online advertising services.
- Digital Advertising Space: Provision of digital advertising space or related facilities/services for online advertisement.
Other services may be included in the future as notified by the authorities.
Exclusions from Equalisation Levy
The Equalisation Levy doesn’t apply in certain cases:
- Permanent Office in India: If the non-resident service provider has a permanent office in India and the service is linked to that office/establishment.
- Payment Below Rs. 1 Lakh: When the total consideration for a specific service is less than Rs. 1 lakh.
- Non-Professional Use: If the service is not intended for professional or work purposes.
- Exemption under Section 10(50): An exemption is provided under section 10(50) of the Act to prevent double taxation for income arising from specified services on which equalisation levy is chargeable.
- Fees or Royalties: Income chargeable to tax as fees or royalties for technical services is not considered for equalisation levy purposes.
Due Dates for Compliance
The due date for furnishing the Equalisation Levy Statement (Form-1) is on or before 30th June of the financial year unless an extension is granted.
Consequences of Delayed Payments
In case of delayed payments:
- Interest is charged at 1% of the outstanding levy for every month or part thereof that is delayed.
In case of non-compliance by the service recipient:
Penalty for Failure of Payment:
- If the Equalisation Levy is not deducted, a penalty equal to the amount of the levy not deducted is imposed (along with interest and the principal levy outstanding).
- If the Equalisation Levy is deducted but not deposited, a penalty of INR 1,000 per day is imposed, subject to the maximum of the levy not deposited (along with interest and the principal levy outstanding).
- Disallowance of such expenditure in the hands of the payer may occur unless the defect is rectified.
Penalty for Failure of Filing Statement of Compliance:
- A penalty of INR 100 per day is imposed for each day the non-compliance continues.
Prosecution:
- If a false statement is filed, the person may face imprisonment for up to 3 years and a fine.
Expansion of Equalisation Levy
In 2020, India extended the scope of the Equalisation Levy to cover e-commerce sales of goods and services provided by non-resident operators to Indian customers. The levy is applicable at a rate of 2% and is targeted at online merchants who are not Indian residents. It sets a threshold of Rs. 2 crores for applicability.
Tax withholding and levies in the digital marketing landscape are essential for businesses operating in the digital realm. Compliance with these regulations not only ensures adherence to the law but also prevents tax-related complications and penalties. With the ever-evolving digital landscape and the government’s commitment to ensuring tax compliance in the digital economy, staying informed and proactive is vital.
Conclusion
In the age of digital marketing and global transactions, navigating the complex terrain of tax withholding, TDS, and Equalisation Levy is imperative. Businesses engaging in online advertising must diligently adhere to the relevant tax regulations to avoid legal ramifications, penalties, and disruptions to their operations.
As tax laws and regulations evolve, it’s crucial for businesses to stay updated and seek expert guidance to ensure compliance. The digital marketing arena offers tremendous opportunities for growth and expansion, but understanding and managing the associated tax responsibilities is equally crucial for long-term success.
ViTWO believes that by proactively addressing digital marketing expenses in the context of tax withholding and the Equalisation Levy, businesses can not only ensure compliance but also contribute to the growth of the digital economy while avoiding the pitfalls of non-compliance in an increasingly interconnected world.
In case you are unaware of these tax implications and somehow, miss out on the same in your business transactions, this article is for you and of course, you can seek out ViTWO’s expertise for a compliant, risk-free and streamlined financial accounting.
