The digital space has grown rapidly in the past few years and is expected to grow substantially in next few years too. The biggest beneficiaries of this rapid growth in the digital space are companies earning through digital ads like Google,Facebook,Twitter,LinkedIn etc.
Moreover, these companies are located outside India, and hence they are not even subject to any taxes in India. These new business models have created new tax challenges by challenging the current manner of levy of tax which are based on the presence based on permanent establishment rules..
The ‘Google Tax’ or ‘Facebook Tax’ which was first announced in the FY17 budget statement by Finance Minister Arun Jaitley will be levied from June 1. Here’s all you need to know about it — what Google Tax is, who will pay it, and its implications —
As the name suggests, it’s got something to do with e-commerce companies.
The Google Tax was announced to introduce a tax on the income as accrue to a foreign e-commerce company outside of India. Google Tax or ‘equalisation levy’ as it’s called in India, is expected to impact the bottomlines of giants like Google, Facebook, and others.
Why has the tax been introduced?
The tax has been aimed at technology companies that make money via online advertisements. Their revenue is mostly routed to a tax haven country. This tax will help bring the said companies under the tax radar in India. With this new tax, India has also joined the list of other Organisation for Economic Cooperation and Development (OECD) and European countries where a similar tax is already in place.
The government has earned Rs.100 crore in revenue on account of the equalisation levy so far. Companies like Facebook, Yahoo, Twitter and Google earn significant revenues from India from local advertisers. A committee set up by the Central Board of Direct Taxes to examine indirect taxation in India of e-commerce had recommended an equalisation levy of 6-8 per cent on 13 broad services based on the OECD’s Base Erosion and Profit Shifting guidelines.
A tax is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or administrative division. Failure to pay tax is punishable by law.Tax is not a voluntary payment or donation.It is a contribution imposed by government, state or administrative division to enable them to meet the expenses.
So if anybody earns an income, he should share a portion of the same with the government. In India, taxes are divided in Direct Indirect Tax.
The way in which taxes are imposed, decides whether the tax is direct or indirect.
If a tax is levied directly on a person income then they are called direct taxes
Whereas the indirect taxes are levied on a product or a service the incidence of which is borne by the consumers who ultimately consume the product or the service.
For example I earn Rs. 12 Lac as salary. Suppose I need to pay Rs. 8000 as income tax on this salary income. Since the income tax of Rs. 8000 is directly levied on my salary income hence income tax is direct taxes.
Suppose in second case, I paid Rs. 950 (Rs. 900 basic amount + Rs. 50 as service tax) as my mobile bill to Airtel. Airtel will retain Rs. 900 and pay the Service tax Rs. 50 to the government.
Difference between Direct Tax and Indirect Tax:
There are different implications of direct and indirect taxes on the country. However, both types of taxes are important for the government as taxes include the major part of revenue for the government.
Key differences between Direct and Indirect Tax are:
- Direct tax is levied and paid for by individuals, Hindu undivided Families (HUF), firms, companies etc. whereas indirect tax is ultimately paid for by the end-consumer of goods and services.
- The burden of tax cannot be shifted in case of direct taxes while burden can be shifted for indirect taxes.
- Lack of administration in collection of direct taxes can make tax evasion possible, while indirect taxes cannot be evaded as the taxes are charged on goods and services.
- Direct tax can help in reducing inflation, whereas indirect tax may enhance inflation.
- Direct taxes have better allocative effects than indirect taxes as direct taxes put lesser burden over the collection of amount than indirect taxes, where collection is scattered across parties and consumers’ preferences of goods is distorted from the price variations due to indirect taxes.
- Direct taxes help in reducing inequalities and are considered to be progressive while indirect taxes enhance inequalities and are considered to be regressive.
- Indirect taxes involve lesser administrative costs due to convenient and stable collections, while direct taxes have many exemptions and involve higher administrative costs.
- Indirect taxes are oriented more towards growth as they discourage consumption and help enhance savings. Direct taxes, on the other hand, reduce savings and discourage investments.
- Indirect taxes have a wider coverage as all members of the society are taxed through the sale of goods and services, while direct taxes are collected only from people in respective tax brackets.
- Additional indirect taxes levied on harmful commodities such as cigarettes, alcohol etc. dissuades over-consumption, thereby helping the country in a social context.
Both direct and indirect taxes are important for the country as they are intricately linked with the overall economy. As such, collection of these taxes is important for the government as well as the well-being of the country. Both direct taxes and indirect taxes are collected by the central and respective state governments according to the type of tax levied.
Financial statements represent a formal record of the financial activities of an entity. These are written reports that quantify the financial strength, performance and liquidity of a company. Financial statements reflect the financial effects of business transactions and events on the company.
Statement of financial position, also known as the Balance Sheet, presents the financial position of an entity at a given date. It is comprised of the following
- Assets: Something a business owns or controls (e.g. cash, inventory, plant and machinery, etc)
- Liabilities: Something a business owes to someone (e.g. creditors, bank loans, etc)
- Equity: What the business owes to its owners. Equity therefore represents the difference between the assets and liabilities.
Income statement, also known as the Profit and Loss Statement, reports the company’s financial performance in terms of net profit or loss over a specified period. Income statement is composed of the following :
- Income: What the business has earned over a period (e.g. sales revenue, dividend income, etc)
- Expense: The cost incurred by the business over a period (e.g. salaries and wages, rental charges, etc)
Net profit or loss is arrived by deducting expenses from income.
Cash flow statement, presents the movement in cash and bank balances over a period.
- Operating Activities: Represents the cash flow from primary activities of a business.
- Investing Activities: Represents cash flow from the purchase and sale of assets other than inventories (e.g. purchase of a factory plant)
- Financing Activities: Represents cash flow generated or spent on raising and repaying share capital and debt together with the payments of interest and dividends.
Statement of Changes in Equity, also known as the Statement of Retained Earnings, details the movement in owners’ equity over a period. It is derived from the following components:
- Net Profit or loss during the period as reported in the income statement
- Share capital issued or repaid during the period
- Dividend payments
- Gains or losses recognized directly in equity (e.g. revaluation surpluses)
- Effects of a change in accounting policy or correction of accounting error
Financial statements are used by so many different types of people from investors, to creditors, managers and even employees. These statements are proven useful tools that provide valuable information about a business enabling the user of the statements to make the most appropriate business decisions.