India has taken the first step to tax the digital economy. An equalization levy--a deduction of 6% to be made by an Indian payer on payments to a non-resident entity for specified B2B services such as advertising --has been introduced in the Budget. The levy will impact the bottom lines of giants such as Google, Yahoo and others, which earn ad revenue from business entities in India. In professional tax circles, it has been dubbed `Google tax'. Once applicability of this levy is notified, an equalisation levy of 6% will have to be deducted by a business entity in India which makes payments exceeding Rs 1 lakh in the aggregate in a financial year to a non-resident service provider for specified services. For now, specified services includecover online advertisements, provision for digital advertising space or any other facility or service for the purpose of online advertisements, but industry fears that the list could be expanded. Currently, the intent is to levy 6% only on online advertisement payments exceeding Rs 1lakh. But it is interesting to note that the proposed section is wide in its scope and gives powers to the government to expand the definition of specified services in the future. For example, on the e-commerce platform many other services are availed of, such as books, music, games, education, to name a few. This could be a start of a new trend of bringing more services within the ambit of an equalisation levy. The double-whammy for such companies is that it is not an income tax levy, so it would be difficult for foreign companies to claim a tax credit in their home country for the equalization levy withheld in India or to get a reduced rate under a tax treaty

The Budget proposals also prescribe that Indian payers who do not deduct the equalisation levy against pa yments made by them and do not deposit it with the government will be disallowed such expenditure from computing their taxable profits.In other words, their taxable income will be higher by the amount of the disallowed expenditure, which will mean a higher tax outgo.