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Advertisements are one of the main revenue sources for internet-backed companies globally. And, their business model in India, a priority market for them, especially because of its fast-growing internet population, is not much different.
Some such companies have officially said they are now monetising their platforms in India, and it is believed advertisements will be a key revenue stream for them. However, these companies are understood to be paying little or no tax in India on the revenues they earn from advertisements, given that the government is yet to figure out how these firms could be brought under the tax net.
Loopholes in the law?
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According to tax experts, it might be difficult to fault companies like Facebook, Google, Yahoo! and Twitter, or accuse them of evading taxes, under the current laws. Such internet companies - which do not operate as permanent establishments here - might not be taxable under the present Indian legal system, the experts say.
If an advertiser puts an advertisement on social networking site Facebook, for instance, the fees for it are paid to Facebook Ireland. The invoices (some of which have been reviewed by Business Standard) come from Facebook Ireland, even if the payments eventually are made in the Indian currency.
This model is followed by Google, Yahoo! (routed through their respective US entities), and almost all other internet companies. Though all of them also have their Indian subsidiaries, these arms provide specific services, and some operate as marketing arms.
Facebook, Google, Yahoo!, LinkedIn and Twitter did not respond to Business Standard's queries on the issue.
The chief of the Central Board of Excise and Customs (CBEC) had recently said at an open forum that there was a need for better understanding on taxing internet and e-commerce companies. The government, meanwhile, does not seem to have a ready estimate of the notional loss to the exchequer on account of non-taxation of these companies.
A senior tax official, who does not wish to be named, explains: "Most of our laws are addressed in terms of companies' office presence or distribution centres in India. So, these taxation laws cannot be applied to internet companies, even if they have a sizeable customer base in India."
The country's tax authorities seem to be trying to address this issue by experimenting with some of the provisions in law. They contend these companies' profits should be taxable here, as their business is carried out of India.
The income-tax authorities have in certain cases considered running a website out of the country equivalent to a company's presence in India, while in some others they have held that a running server in India should be seen as amounting to permanent establishment here.
Who is at fault?
There seems to be no clear answer to whether these companies could be said to be evading taxes. Another senior tax expert associated with one of the top four auditing firms, asking not be named, says: "In simple terms, they might indeed be evading taxes. But they cannot be held liable, legally. There is a flaw in the law." This expert has earlier been engaged in related issues.
"Technically, these companies are not doing anything wrong; the legal system allows them to do so. But there could be a way to ask these companies to disclose details of advertising revenue they generate in India, if the government so wants. The business is generated here, so they should ideally be taxed here," he opines.
Citing loopholes in the law, Shreya Rao, senior member (international tax practice), Nisith Desai Associates, says: "Geography-focused source rules are a major reason why there is no clear way to tax global e-commerce companies. This is not an issue unique to India; it is a problem faced by authorities the world over. The Base Erosion and Profit Sharing (BEPS) initiatives are aimed at finding a solution to this issue."
In April 2013, the Income-Tax Appellate tribunal (ITAT) in Kolkata held that payments to websites like Google and Yahoo! for online advertisements were not liable to be taxed in India. The order was passed by George Mathan and Pramod Kumar in an appeal filed by Right Florist Pvt Ltd, which had paid about Rs 35 lakh for its advertisements on the Yahoo! and Google websites in 2005-06.
The tribunal held that the websites could not be construed as permanent establishments or as taxable presence of foreign enterprises owned and maintained in India.
Also, since the web servers are located outside of India, no permanent-establishment risk to India exists. So, these incomes should be taxable in countries where the servers are located - there is no clarity where the server for India are located.
What the Indian arms 'earn'
According to the balance sheet (filed with the registrar of companies) of Facebook India Online Services Pvt Ltd, the Indian entity of Facebook Inc, the company earns by rendering services to its parent company and "export of computer software services". In its balance sheet, it does not show revenue from advertisements, as the Indian entity does not generate revenue from advertisements or sale of online space. Facebook India Online's RoC filings show the entity earned a revenue of Rs 97.65 crore in 2013-14. Facebook India paid taxes on this amount, which it earned by offering certain services to its parent.
According to Google India Pvt Ltd's RoC filings, this company markets and distributes the 'Adwords programme' of its fellow subsidiary in India. It invoices its customers (advertisers) on the basis of display or clicks received by the advertisements placed on the member websites of Google Network. What it shows in its balance sheet is the net of distribution fees payable to the fellow subsidiary (it does not disclose the total advertisement revenue it earns from India). It also has some other products and services that it sells here. In 2013-14, it reported a revenue of Rs 3,050.69 crore. However, Google India's RoC filings did not indicate details of other subsidiaries.
Yahoo India Pvt Ltd, the Indian arm of Yahoo! Inc, works as a reseller of Yahoo!, besides offering marketing and portal development services to the parent and other subsidiaries, as mentioned in its annual report to RoC for 2013-14. During this year, it reported a revenue of Rs 219.30 crore.
Financials of other social networking websites also reveal limited annual earnings of their Indian entities. LinkedIn Technology Information Ltd, the Indian arm of LinkedIn Corporation, for example, reported a profit after tax of Rs 4.7 crore during 2012-13. This was the last year for which it disclosed financial details to RoC. LinkedIn's Indian subsidiary gives certain services to its parent. Its balance sheet said the Indian entity had pending receivables from LinkedIn Corporation, USA, the ultimate holding company, and LinkedIn Ireland, its immediate holding company.
Twitter Communications India Pvt Ltd, the Indian arm of microblogging site Twitter, did not specify operational details in its annual balance sheet. According to RoC filings, its revenue from operations stood at Rs 4.1 crore in 2013-14. Tax experts say there is a need for more clarity, considering a preference in India of internet-backed companies as a fast-growth advertising vehicle. India's online advertisement market, worth Rs 2,900 crore in 2013, is estimated to grow three times to about Rs 10,000 crore in five years, at a compound annual rate of 28 per cent, according to a report by the Confederation of Indian Industry and PricewaterhouseCoopers.
TAXING DILEMMA
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Rs 2,900 crore: Size of the online advertisement market in 2013, according to a CII-PwC study; it is estimated to be worth Rs 10,000 crore by 2018
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To tax or not? Though online advertisements are a major revenue source for internet companies and social media platforms like Facebook, Google, Yahoo! and Twitter, these firms do not fall under tax ambit under India's current laws
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How it works: Customers get bills and invoices for the advertisements put up on these websites from entities located abroad (Ireland or US), even if the payments are made in the Indian currency
