Indian Service Tax Dept says AdSense earnings are not export of servic

[castor_t]

An Indian friend of mine is running AdSense on his websites and his earnings are over 10 Lakhs which is the limit for exemption under Service Tax rules in India. He said the services are export of service since he is providing the service to Google USA (receiver of service), that he receives his earnings in USD (fully convertible foreign currency) and that his web server is located in the US (place of providing the service). Export of Services are exempted and hence he says he does not pay any service tax.

However, the Indian Service Tax Dept has initiated an investigation and is saying that his services are not Export of Service. They said that since the ads are also shown in India, possibly by Google Inc's subsidiary Google India, the services are not export of service since they are also consumed in India.

Is this fair? Does any one have any case laws / idea to prove that the services are indeed exports?

[rajivatre]

I remember google india has lost a case on this issue in Supreme court of india.
They did not want to pay service tax on ad revenue collected by their subsidiary google india.
So they stopped doing business in the name of google india.
You get only support from google india not invoice.
On similar lines Service Tax Department must have served notice to your friend.
In IMHO even if you are exporting services more than 10 lakhs per year and if you are not located inside SEZ (notified by govt) then you are liable to pay service tax and income tax and other applicable taxes.

Thanks
Rajiv

[Green_Grass]

Let us know how it goes. A past court verdict went against Google regarding Adword income and they were asked to pay Service tax on AdWord income they generated from India. So Google did the smart thing and never billed from India.. Always Ireland.

After having failed to get G to cough up.. The service tax authrities may have shifted the line of attack to adsense publishers. The point to be noted is that adSense is NOT adWords and it big G who is liable to Service tax and not individual publisher who gets only a revenue share ( after presumably all taxes etc have been paid by G). Now if G is smart enough to avoid billing from India.. how are the publishers liable?

Do follow this case closely and update us as it has implications for all Indian publishers..

[rajivatre]

@Green_grass: Firstly as per the Service tax authorities google adwords was earning from showing advertisement on their website so they have to pay Service Tax on the Advertisement amount collected in India.
In case of individual sites as per Service Tax Department we (site owners) are showing advertisement (adsense or anything else) on our site so if we cross Rs.10 lakhs in a year we are coming under service tax.

I have confirmed it with my Chartered accountant.
Please note here that Service Tax department or most of CAs dont understand how adsense works.
Service Tax Department dont care whether google paid taxes or no. Their simple logic is it goes under "Advertisement on Website" clause to which service tax is applicable.

I am no tax expert so better to take a professional advice to be sure.

Export of Services are exempted

Not unless you are located in SEZ.


Thanks
Rajiv

[Green_Grass]

AdWord / AdSense are two sides of the same advertising coin. If Service tax has been paid on adWords.. then how can the SAME tax be paid again on adSense?

The discussion is not closed. However, would love to know how big portals in India such as indiatimes/ sify / various big newspaper websites in India etc handle this matter.. Any info ? could be very useful.

[rajivatre]

Ok, I will just give one example of portal moneycontrol.
I know somebody over there and i had a discussion with their accounts department as well. They said they show it as income from advertisement and pay whatever necessory taxes.
In my previous company we had this same problem. Income was much more than 10 Lakhs per year from Adsense. We had no choice but to pay Service tax on whatever we are earning through Adsense.

If Service tax has been paid on adWords.. then how can the SAME tax be paid again on adSense?

please note here that You cannot prove that google is paying Service Tax on Adwords. So it is your liability to pay relevant taxes. Service Tax department cannot catch hold of google because the payment is coming from Ireland.

Again I am saying look at the whole thing from the Taxman's point of view.
His simple question is
1) You are earning X amount per month from google as what?
It all depends upon your answer. If you say this is Advertisement charges for showing advertisement on my site then it comes under service tax. You cannot show it as sell of goods can you? So in one way or other its Sell of Services. Which comes under Service Tax in india.

In my opinion there are few options if you are earning more than 10 Laks per year.
1) Try to open a Company in SEZ in india or abroad and show all your income in that company.
2) Divide your income in 2-3 adsense accounts with different names (your wife, brother, father etc.) or different companies in order to keep the earning in each account less than 10 lakhs.
(I know Adsense is having a problem with this.But IMHO if you have 2 legitimate entities such as 2 different persons or 2 different companies, then Adsense wont have a problem)
Many regular (not adsense ones) businesses do this to avoid getting under service tax.
3) Simplest option is pay service tax by reverse calculating the amount and Service tax on top of it so that it will match total amount coming from google and raising invoice to google. (Which google has already paid :) ).

I hope this is useful to other indian publishers.

Thanks
Rajiv

[castor_t]

One important criteria for deciding whether a given service is an export or not is about the ultimate beneficiary / the company who benefits in the service.

As AdSense publishers, the beneficiary of the service provided by AdSense publishers is definitely Google USA.

And when Google USA, via Google AdWords, is directly or through its subsidiaries, is selling the service to its clients in India, it becomes an export made by Google USA.

I wish there is a good case law that deals with exports of services which clearly shows that the AdSense publisher services are export of service, provided the other criterion for the export of service are also met.

[kriru]

Simplest option is pay service tax by reverse calculating the amount and Service tax on top of it so that it will match total amount coming from google and raising invoice to google. (Which google has already paid :) ).

This is a bit complicated for my low IQ. Can you please explain in simple words what is to be done ?

[rajivatre]

This is a bit complicated for my low IQ. Can you please explain in simple words what is to be done ?

Sorry for being complicated. Ok let me give an example.
Suppose you are earning say US$200 in a month.
So you need to calculate reverse way. Like in your invoice which you will show as raised to google the basic amount will be something like
Billing Amount $181.90
Add +10% service Tax + $18.19
---------------------------
$200.09
This is just an example and you can adjust the amounts in actual calculations.
Also I have given example in US$ but since we are receiving payments in Indian Rupees the invoice should have Indian Rupee as currency.

IMHO there is no point in going and convincing or fighting with the Service Tax department because most of the people there wont understand anything about it and they will only drag your case for longer period of time.
Better to pay 10% to goverment and buy a peace of mind. :)

Thanks
Rajiv