Avoid Service Tax for Online Ads in India Legally
If you spend money on online advertising in India, you have to pay 14.5% service tax on your ad spends. Because “online advertising” is a service and all services attract a service tax in India. This is an indirect tax, a tax on consumption unlike a tax on income.
Online advertising was exempt from service tax for a while from 2012 to 2014 but it has come back again to give digital marketers in India a pain.
So if you are spending Rs.100 on online ads and earning Rs.100 in sales, you are breaking even, right? Actually no. Because you are going to end up spending Rs.114.5 with the taxes on online advertising.
For example, when you spend money on Google AdWords or any other website in India, they will levy you extra 14.5% service tax on your bill.
This number is not shown in your ads dashboard in Google AdWords. You may be thinking that you are spending Rs.100 per conversion but in the end you will pay Rs.114.5 per conversion. (More about Google AdWords payments later in this article).
This Rs.14.5 per Rs.100 service tax goes to the Indian government and they don’t care whether you made a profit or not while running your business. This is tax on spending, not on income or profit.
So here you end up losing money in taxes even if your business has not profited. That’s bad, unfair and unethical.
And if all this is not enough to make you angry, hear this: Print Ads are exempt from service tax! An industry that is mature enough, decades old and suspected of having unaccounted money in circulation of its economy.
Why Service Tax?
Thinking from the first principles, service tax and VAT are taxes on consumption. Service tax on consumption discourages spending and encourages savings and investment. It is an indirect tax and indirect taxes nearly account for 50% of all taxes collected.
This is actually good for consumers & the nation. People will spend less on restaurants and spas. With the money left over they will save more. Since they will save the money with a bank account, banks will have more cash reserve to loan out money to businesses. And if businesses get credit, they will invest money and create jobs and help grow the economy.
But when businesses spend on services, it is an investment. Not an expense that has to be discouraged. In my opinion, service tax on spends should be exempt for all business entities.
I invest in online ads and I am not spending it. I am building my email list, my brand, my business etc. that will eventually create more jobs and boost the economy.
How to Avoid Service Tax Legally?
So how does a small business or a solopreneur like me avoid service tax on online ad spends? I look for legal ways to avoid paying this tax. Right now, honestly, I am not even making a direct profit from the ad spends. I am still building my brand and other business assets.
The profits are going to come after a few years and at that time I won’t hesitate paying the income taxes. Paying taxes on profit is fair.
So, here’s the work-around: if you buy services from abroad, there is no service tax. (Same goes for exporting services). You can pay people/companies for ads who are not in India and there is no service tax liability.
Many online giants like Google and Facebook – where we would end up spending most of our ad dollars have presence in multiple countries. If you pay Google India, there is a tax. However if you pay Google US, there is no tax.
So all my Facebook Ad Spends in India doesn’t attract a service tax because I am paying in USD using my credit card. The money goes to a Facebook company incorporated outside India.
Paying for Online Ads in $ With Credit Card
If I pay in USD using my credit card, there is a 3.5% currency conversion charge levied by my bank that cannot be avoided. They call it Foreign Currency Markup Fee. First the amount is converted into INR on the existing conversion rates.
And then there is a consolidated fee that is charged for all the conversions they made. There are some credit cards that charge only 2 – 2.5% on currency conversion but they come with annual charges and other hidden costs. Or you have to be a long term loyal customer to get such cards. HDFC Regalia Credit Card has only 2% FCY Markup Fee.
Most of my basic credit cards with little no no annual fees charge 3.5% FCY Markup. (And again the Indian government wants 14.5% of that charge! And there is some more tax on the taxes).
Look at this screenshot from my credit card statement!
That makes it 4% on the currency conversion fees. So if I spend $100, I am spending $104. But it is still a lot less than 14.5%
Facebook Payments in India
As far as I know, Facebook charges for advertising only in USD. You can pay via PayPal, Credit Card and certain debit cards. So there is no issue of service taxes.
However, while creating an account, if you see an option to choose INR or USD, choose USD. I believe Facebook will be rolling out more options for payments in India as they expand in India.
Google AdWords Payments in India
You can avoid the Service tax on Google Adwords spends if your account is in USD. While opening an AdWords account, you will have the option of INR or USD. I always choose the USD payment option and pay using my credit card. This doesn’t attract service tax because you are not paying it to Google India.
If you spend in INR, you have options of loading funds in your account with Netbanking payments. That’s the only upside of having an AdWords account based in INR. But you will be charged extra for service tax.
Look at the following screenshot. For Rs.25,000 in ad spend they have deducted Rs.3070.18 in Service Tax.
The service tax was only 14% until recently. Now it has gone upto 14.5%. Swachh Bharat Cess (SBC) it is. India better be clean now!
Here’s the email I got from Google:
This is to inform you that as per the notification issued by the Ministry of Finance, Government of India (Notification No. 21 dated 06 Nov 2015), effective rate of Service tax has been increased from 14% to 14.5% with effect from 15 Nov 2015 on account of levy of Swachh Bharat Cess (SBC).
Due to the said change in India’s Service tax regulations, effective 15 Nov 2015, Service Tax @ 14.5% will be applicable on sale of online advertisement space by Google India Private Limited. This change will take effect for all invoices dated on or after November 15, 2015 raised with respect to sale of online advertisement space.
Notice that it is Google India Private Limited. They are not allowed to charge you in USD. So the payments will go to Google India only when you pay in INR. However if you pay in USD, Google India cannot receive the payments and hence there is no service tax.
Same goes for hosting and email marketing services as well. If you pay in USD to companies in abroad, there is no service tax.
Are You a Publisher?
If you are a publisher (blogger, website owner etc) then you have to charge service tax to your buyers (in India) when they are buying ads on your website. This is applicable only if the total receipts exceeds 10 Lakhs INR in one financial year. (oh, how generous!).
(Image Source: HellBoundBloggers)
However, there is no service tax if a foreign company buys ads on your website. Technically, you are exporting a service (online advertising) and there are no service tax for that.
There is no tax for exports because Indian government wants to encourage foreigners to buy from India. This helps us (India) build foreign currency reserves.
As of November 13th, RBI has $352 Billion in foreign currency reserves. If you sell an ad slot for a billion dollars on your website to a company outside India (hypothetically) then RBI’s FCY reserves would go up by another $1 Billion to $353 Billion.
And in turn RBI would give you Indian rupees on the current conversion rates – that gets deposited in your bank. $1 Billion. That would be ~Rs.6,600 Crores.
Service Tax Double Taxation?
If you spend Rs.100 on online ads, you will pay Rs.14.5 service tax on it. However, if you sell a service for Rs.100, you need to charge your buyer another Rs.14.5 in service tax. This is when all transactions happen within India, which in some cases in unavoidable.
Example, if you are a publisher, you spend money on ads and you earn money on ads. However, you will not be double taxed.
Here, there is an option to balance it out.
@ Service Tax that you charge to your buyer while selling a service for Rs.100 is Rs.14.5
@ Service Tax that you pay for every Rs.100 spent on services is Rs.14.5. (On online ads or other business operations)
Which means that your buyer who is consuming the end-product is paying the tax and you are just the middle man.
The service tax that you collect from your buyer is something you can keep for yourself because you have already paid Rs.14.5 service tax in the process of running your business.
To help you understand better, if you are selling a service for Rs.200 (you would collect Rs.29 in taxes from your buyers), and if you have bought services for Rs.100 (you would have paid Rs.14.5 in taxes).
Now you have to pay the excess Rs.14.5 (29-14.5) that you have collected from your buyers. So your total service tax tax obligation is Rs.14.5 (and not Rs.14.5+29 = Rs. 43.5).
So service tax is not doubled taxed. However, if you are selling a product, then you are screwed. You have the charge VAT on your products that goes to the state government, and there is no balancing it out. Consult a financial expert for more advice on it. I am not an expert in this. (Disclaimer is given at the bottom.)
Additional Burden of Compliance
Service taxes on online ads burdens the publishers and advertisers with extra compliance requirements. While you are spending money on services there is no process involved because you are paying extra with the taxes, and the seller of the services takes care of paying the service tax to the government.
However, if you are selling services and collecting service tax from your buyers, you are responsible for going through the red tape and paying the taxes to the service tax department.
That process also costs time and money (like going in a cab, consulting an expert or making phone calls regarding this – which again has service taxes – which you pay from the income you made on which you have already paid income taxes!)
If service tax for online ads is exempted, webmasters can save time and money, that could otherwise be invested in creating value through our business.
So right now, it makes business sense not to buy or sell ads within India. Eventually, the people who designed such a tax system are incentivizing us to make foreign companies richer and Indian companies and service providers poorer.
By now you would have noticed that this post was more of a rant apart from the information provided here. I started it as an informative post but I couldn’t help complaining and some inserting some sarcasm.