India introduced a tax on e-commerce companies in the February Union Budget. What’s unusual about it? Don’t all companies have to pay a tax on their profits? Yes, but this is about e-commerce companies, which do not have a permanent establishment in India. For tax purposes, they are non-residents and hence not subject to income tax. Obviously we are not talking about Flipkart, Big Basket, Swiggy or Zomato, which are all desi companies with a presence in India – although it is possible that they ‘moved’ their head office out of the country after getting acquired by global giants. We are talking about companies like Google, Amazon and Netflix. All of them happen to be American companies. Hence the new tax, which is actually called a ‘levy’, is often referred to as the ‘Google Tax’. It is 2 per cent of revenues, if your aggregate revenue from India is more than Rs 2 crore.
A company like Google makes money from advertisements, which show up on the right-hand side of your search. Or when you watch YouTube. Or sometimes even in Gmail. For users all these services, and many more such as Google Maps, are free. But the company makes money from those tiny ads that keep popping up now and then. Their customer is the advertiser, not you, the user of those services. In fact, a company like Google is selling you, or rather your ‘eyeballs’, to the advertiser. Since the ads can be small and truly micro-targeted, i.e. they show up only based on what you are searching, the ad rates are small.